Following the passage of legislation last week, Treasurer Jim Chalmers has confirmed that the changes at the Reserve Bank of Australia (RBA) should apply after the February meeting.
Namely, as of 1 March, the bank should have a two-board system – one to set the cash rate and the other for governance.
Originally slated to take effect on 1 July, the legislation implementing the findings of an independent review into the RBA had been delayed in the Senate. The reforms appeared to be on the brink of collapse, but in a marathon sitting last week, the government managed to negotiate a deal with the Greens to secure the central bank’s biggest shake-up in over three decades.
“As I understand it, the RBA reforms come into effect three months after royal assent. Royal assent will ideally be as soon as possible. And so that means our anticipation and what we’ve been discussing with governor [Michele] Bullock is that the changes would apply after the February meeting of the Reserve Bank,” Chalmers said at a press conference on Friday.
“We’ll do a lot of work with governor Bullock, I was in contact with her last night. Governor Bullock’s done an amazing job getting her ducks in a row to make sure that we can progress this reform now that it has passed the Parliament. Our expectation, what we’re anticipating, is that the new board would be constituted after the February meeting.”
In a separate statement, the Treasurer said that besides a new two-board system, the RBA will also get a new objective – to “promote the economic prosperity and welfare of the people of Australia, both now and into the future”.
The law also confirms that monetary policy should have dual objectives of price stability and contributing to full employment, and clarifies the RBA’s responsibility to contribute to financial system stability.
“This legislation also establishes robust governance arrangements for the RBA,” Chalmers said.
“Despite years of detailed consultation with the Opposition, the Liberals and Nationals refused to support these important reforms, forcing the government to pass this legislation with the support of the crossbench.
“These changes are part of the Albanese government’s broader efforts to reform, renew and refocus the nation’s key economic institutions so that they can help meet current and future challenges.”
‘Unfortunate’ development
Commenting on the reforms, AMP’s chief economist Shane Oliver said it is “unfortunate” that the bank is set to undergo these changes.
A staunch opposer of the reforms, Oliver said in a market update: “This is unfortunate as there is no evidence that the RBA review’s proposal to set up a separate interest rate setting board would lead to better outcomes or that it’s world’s best practice.”
Instead, Oliver said it could reduce RBA’s accountability and create confusion.
“The lack of bi-partisan support for the reform also leaves it weakened and the Coalition is right to be concerned that the government could stack the interest rate setting board with soft-on-inflation economists which would undermine the RBA’s inflation fighting credibility and lead to higher than otherwise interest rates in Australia over the long term,” the chief economist said.
“If the new rate setting board with government appointed members is set up by 1 March next year, as indicated in the legislation, and then the RBA delivers a pre-election rate cut in April after having left rates on hold in February, it could lead to questions about the independence of the new board and dent the RBA’s credibility.”
