Reserve Bank of Australia (RBA) governor Philip Lowe had pushed for a review of it to be undertaken by the central bank itself, in partnership with the Treasury.
However, Treasurer Jim Chalmers has advised that a panel of independent experts will carry out the review, including a monetary policy expert from overseas. Amongst other things, it is expected to consider issues such as the RBA’s inflation target, the composition of its board and the processes for making appointments to the board.
This decision comes after a group of senior economists recently urged Chalmers to commission an independent review of the central bank. The review is slated to report its findings by June 2023.
From The AFR:
Dr Chalmers has almost finalised a model for a review into the RBA, including the terms of reference and the small panel of review members, a source close to the process said…
The current nine-member board includes five business people. The four economists are Dr Lowe, deputy governor Michele Bullock, Ian Harper and Treasury secretary Steven Kennedy.
Dr Chalmers has vowed to include monetary policy’s interaction with the government’s fiscal policy in the review.
It is unclear if the Reserve Bank Act will be prised open under the review…
The review will be asked to report by June next year, after the government’s second federal budget in May and before Dr Lowe’s seven-year term expires in September 2023, the source said.
It is heartening to hear that the RBA will be reviewed by an external panel. Phil Lowe’s proposal for the RBA to review itself was ridiculous and lacked credibility.
We also need an independent outsider leading the review, rather than a captured insider.
Below are a list of topics that MB would like to see included in the RBA review:
Monetary policy theory
- Does the efficient market hypothesis still hold currency for central banking?
- Why has inflation failed to materialise given monetarism says it should have done so long ago?
- How does debt fit with the picture in the long run? Is it time to abandon the Pitchford thesis?
- Does setting the cash rate and letting the market take care of the rest deliver national interest outcomes?
Monetary policy structure
- Is the separation of the RBA and APRA appropriate today?
- How can inflation goals be met in a future world of zero interest rates and currency devaluation?
- How should macroprudential and other unconventional tools complement the cash rate?
- Is an inflation target that excludes asset prices relevant any longer?
Monetary policy practice
- Should the RBA be free to comment on such issues as immigration and fiscal policy given they impact its job?
- Is the RBA being over-relied on to manage the economy, and should government fiscal policy take a more central role?
- Does a board of business rent-seekers infecting decision-making make sense?
- Has the RBA culture become insular and withdrawn from new ideas?
- Did the RBA’s 180-degree reversal on rates between March and May 2022 make sense?
- Was the RBA’s forward guidance, which basically promised to keep rates on hold until 2024 appropriate?
Hopefully, the terms-of-reference will be broad enough to capture these issues.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also Chief Economist and co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
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