Shortly after he became Treasurer, in July 2022, Jim Chalmers announced a review of the Reserve Bank – the first since the current monetary policy arrangements were instituted in the 1990s.
A lot of the recommendations from the review were not controversial and could be described as “improved housekeeping”. As Chalmers recently told journalists, the government’s reforms were about modernising and strengthening the bank for the future and making sure that it had the structures, decision-making abilities, people and culture to continue making important economic decisions.
Furthermore, most of the recommendations could be implemented without legislative change. But there were two main recommendations that would represent more significant change and require legislative approval.
The first was to create a separate and more expert Monetary Policy Board which would be better able to scrutinise or challenge the RBA’s underlying economic and financial judgements or policy advice.
The aim would be to shift the nature of the present RBA Board from what the review describes as “an advisory role to one that proactively shapes policy decisions, strategy, and the underlying analyses and judgments”. To this end, this Monetary Policy Board would be recruited from people with deeper economic and financial expertise, and would be provided with more information, time and staff support to fully engage in the policy process.
Consistent with its view about the technical nature of monetary policy, the second significant change recommended by the review is that the RBA should not only retain its present degree of operational independence to set monetary policy, but also that the government’s power to override decisions of the Reserve Bank Board should be repealed, even though it has never been used.
Negotiations with the Opposition
Since the findings of the review were released more than a year ago in April 2023, Chalmers has been negotiating with his opposite number from the Coalition, Angus Taylor, with a view to reaching a bipartisan position on the Monetary Policy Board so that it could then be expected to endure.
According to Chalmers, he and Taylor were on the point of agreement. Chalmers had agreed to all of the six issues raised by Taylor, including that all current RBA Board members could move to the Monetary Policy Board if they wished, and that the provision allowing the Treasurer to override the Board would be retained, although more appropriately focused.
But last week, the Opposition torpedoed the attempt to get bipartisan support to install a specialist Monetary Policy Board, claiming that this change would enable the Treasurer to stack the Board, even though Chalmers was already consulting Taylor about possible appointments. As Chalmers sees it, Taylor has been “rolled again” by his colleagues who are bent on stopping the government from governing.
That effectively means that if the government want to pursue this legislated change to the governance of the Reserve Bank, then it will need the support of the Greens and Independents. But that support is uncertain at best, which then leaves the question of how important is this proposed Monetary Policy Board, and is it worth fighting for?
What difference could the Monetary Policy Board make?
Interestingly, two highly esteemed former governors of the Reserve Bank — Bernie Fraser (1989 to 1996) and Ian Macfarlane (1996 to 2006) — want the current structure of the central bank maintained.
Macfarlane’s concern is that under the proposed restructuring, the influence of the governor and RBA staff over monetary policy would shift to a decision-making board where the majority of votes would rest with six part-time members.
Fraser, if anything, goes further, arguing that interest rates would then be governed by “super monetary policy nerds” who are likely to be overly focused on inflation at the expense of the central bank’s other objectives, including full employment and prosperity for Australians. In Fraser’s experience, the best people to sit on the board charged with determining interest rates are those able to take a broader view of the economy than monetary policy experts, such as the former union leader Bill Kelty.
Frankly, I too strongly agree with Bernie Fraser. In a recent article, I documented how the RBA persistently overestimated annual wage growth by about 1 percentage point every year between 2011 and 2019, because as monetary experts they didn’t understand the changes affecting the labour market. More specifically, the RBA relied excessively on the Phillips curve which purports to show the relationship between unemployment and the rate of wage and price inflation, but they failed to consider the changes occurring in the labour market and how they were impacting the Phillips curve.
To my mind, it is important to get people who have a wider experience and knowledge than monetary policy experts involved in the monetary policy decisions. In particular, we need people with practical experience and knowledge of labour markets.
Fraser referred to the contribution of Kelty in this connection, but there are plenty of others, such as Iain Ross, a former president of the Fair Work Commission and now a Reserve Bank board member. As Ross Gittins reported recently, he was able to explain to the RBA how circumstances have changed so that a wage-price spiral is much, much less of a risk than back in the 1970s. But I fear that this absence of risk of a wage-price spiral is not what the RBA technocrats are instinctively expecting.
Finally, in fairness I should refer to the views of Andrew Hauser, the new RBA Deputy Governor. In a recent speech, not long after arriving here from England, Hauser spoke at length about how the economic outlook is intrinsically uncertain and ambiguous, and how we cannot rely on the assumption that past relationships will not change.
That seems to me to be a very good starting point and gives confidence that with no change in its governance structures, the RBA can be relied upon in future. And there are a lot of other changes recommended by the review to strengthen communications both within and outside the RBA that should ensure its continuing good performance without major structural reforms that require legislation.
Michael Keating is a former Secretary of the Departments of Prime Minister and Cabinet, Finance and Employment, and Industrial Relations. He is presently a visiting fellow at the Australian National University.
Contributions to Pearls and Irritations
Your contribution will fund quality independent comment and analysis in Pearls and Irritations
Contribute
