The Albanese government has accepted in-principle all 51 recommendations outlined in the newly released An RBA fit for the future report, informed by a review of the Reserve Bank of Australia (RBA).
Launched in July 2022, the review was designed to ensure Australia’s monetary policy arrangements and the operations of the RBA “continue to support strong macroeconomic outcomes for Australia in a complex and continuously evolving landscape”.
The review has reaffirmed support for the independence of the central bank and the current inflation-targeting framework.
However, key changes include a major overhaul of the RBA’s decision-making processes, with a call to establish new, function-based, RBA boards (recommendations 8 and 12).
Specifically, a monetary policy board — responsible for monetary policy decisions and oversight of the RBA’s contribution to financial system stability (except payments system policy) — would operate separately from a new corporate governance board.
The monetary policy board would be chaired by the governor, who would work alongside the deputy governor, treasury secretary, and six external members.
The Treasury Secretary, who would act in their individual capacity not at the direction of the Treasurer, would be tasked with providing insight into the outlook for the economy and for fiscal policy.
The external members would be responsible for offering broader insight into macroeconomic trends, the financial system, labour market conditions, and supply-side influences.
External board members would be appointed via a “transparent process”, with positions advertised for expressions of interest and “drawing on a matrix of required skills and experience”.
A panel made up of the Treasury secretary, the governor, and a third party would recommend options for suitable candidates, ultimately appointed by the Treasurer for an initial term of five years.
Meanwhile, a separate governance board would be established to “provide guidance and oversight for RBA management in the running of the organisation” (recommendation 12).
This includes oversight of organisational strategy, financial reporting, large IT and other projects, resourcing, strategic staff planning, risk management (including cyber risk), and delivery of banking and banknote services.
The board would be mostly made up of non-executive members, one of whom would serve as chair.
Recommendation 12 stressed that the governance board “should have no role in monetary, financial stability or payments policy”.
“An important benefit of creating a governance board is to bring outside expertise and knowledge to bear on issues of organisational management,” the report noted.
“The RBA senior executive group is relatively homogeneous in terms of experience and knowledge.”
According to the review, the dual-board model proposed under recommendations 8 and 12 would ultimately strengthen monetary policy decision making by helping maintain the RBA as a “high-performing institution in a complex and challenging future environment”; and enabling the monetary policy board to “focus solely on monetary and financial stability policy”.
However, the review stressed there must be a “clear division of responsibilities” within the RBA between all three of its boards (including the payments system board).
“The RBA’s three boards should establish charters setting out their responsibilities and those of the executive,” the review noted.
To ensure independence of the respective boards, the review has recommended the governance board’s charter restrict its oversight role and “avoid any involvement in the day-to-day running” of the RBA.
The boards should also establish a memorandum of understanding, recording the common understanding of their legislative responsibilities and their expectations for information exchange and consultation on matters of mutual interest.
“This should be designed so that the ability of the policy boards to act, including in crises, is enhanced,” the review stated.
Fewer monetary policy board meetings
The 294-page review also includes a recommendation to reduce the number of monetary policy board meetings from 11 meetings per year — held on the first Tuesday of every month, except in January — to just eight meetings.
According to recommendation 9, this change would “allow for more in-depth discussions” of the forecasts, strategy, and other monetary policy issues.
The extra time would also allow the monetary policy board to “hear the views of a wider range of RBA staff”, particularly for the six external board members.
The time would also enable board members to “convene and engage with an expert advisory group” on monetary policy and receive or request briefings that “more fully consider monetary policy strategy, alternate policy options, costs, benefits and risks”.
“This will support better consideration of monetary policy strategy under uncertainty,” the review stated.
Other recommendations outlined in the report also include:
- Instituting regular reviews of the monetary policy framework and tools (recommendation 4);
- Legislating the RBA’s financial stability role (recommendation 5);
- Taking into account climate risks without using monetary policy to address them (recommendation 7);
- Strengthening monetary policy transparency and accountability (recommendation 10); and
- Strengthening the RBA’s management, culture, and operations.
For recommendations requiring legislation, the government has been urged to legislate the changes to commence on 1 July 2024.
For other recommendations, the RBA has been encouraged to prioritise implementing the recommendations that strengthen monetary policy decision making, communications, and the RBA’s management, culture, and operations in 2023.
The Albanese government’s decision to launch the review last year followed the commencement of aggressive monetary policy tightening from the Reserve Bank.
This was despite previous guidance from the Reserve Bank indicating a hike would not be actioned until 2024.
RBA governor Philip Lowe has since apologised for previous communications, with the bank pledging to refrain from offering dated guidance.
