Among a raft of changes recommended by the review into the Reserve Bank (RBA) is the creation of a new board to deal exclusively with monetary policy, while governance decisions are conferred to a corporate governance board. The independent review panel also assessed that eight meetings a year, instead of the current 11, would allow for better deliberation, while more regular press conferences would help boost transparency.
But Dr Oliver has suggested that there is nothing in the recommendations pointing to a less hawkish RBA that some may have been hoping for.
“The RBA has already been targeting both price stability and full employment under governor Lowe — which partly explains why it’s been less aggressive in raising rates than other central banks,” Dr Oliver said.
“It’s not clear that switching to regular press conferences and commentary from external monetary policy board members will add much except more noise and potentially confusion around RBA decisions (as seen in other countries like the US) and the RBA already supplies a lot of information (maybe too much),” he opined.
In fact, Dr Oliver questioned whether some of the recommendations may push the RBA to be more hawkish.
“Removal of the ‘on average, over time’ reference to the inflation target with the RBA explaining ‘how it is using its flexibility’ may make the RBA less tolerant of short-term deviations from the inflation target and so could result in more aggressive and volatile moves in interest rates posing a greater threat to full employment,” Dr Oliver said.
“Switching to less meetings may contribute to better quality decisions, but it may also make the RBA less agile, reduce “announcement effects” and necessitate bigger moves,” he continued.
Additionally, he questioned whether allowing external members to potentially outvote RBA members on the monetary policy board could create confusion and reduce formal RBA accountability.
“Having more monetary policy experts involved in the determination of monetary policy is a move in the right direction in being better able to challenge the RBA and add to its views. It may at the margin help avert a rerun of some of the RBA’s missteps of recent years in relation to yield targeting and the ‘no rate hike till 2024’ guidance, but having learned from that experience, the RBA is unlikely to repeat them again anyway,” Dr Oliver said.
“The potential for external members to outvote the RBA members on the monetary policy board could create confusion and actually reduce formal RBA accountability.”
Ultimately, the AMP chief economist said that it is questionable whether moving to the separate monetary policy board, fewer meetings, and more press conferences employed in several other countries is justified when those countries have not necessarily achieved better economic outcomes than the RBA.
“Overall, the recommended changes if fully implemented are unlikely to have a significant impact on the outlook for monetary policy. In particular, there is nothing in the recommendations pointing to a less hawkish RBA that some may have been hoping for,” Dr Oliver said.
“Don’t forget that there are plenty of other central banks — in the UK, NZ, Canada and the US — that have separate monetary policy committees, less meetings and press conferences after each meeting, but which have actually been more aggressive and arguably less balanced in raising interest rates than the RBA has!”
To find out more about the review’s recommendations click here.
