Independent Review Outlines Key Points for Upcoming RBA Reform

A man walks past the Reserve Bank of Australia sign in Sydney, Australia, on Sep. 6, 2016. William West/AFP via Getty Images

The Australian government has released an independent review of the Reserve Bank of Australia (RBA) that provides a framework for the central bank’s reform.

The review (pdf) pointed out that the current RBA board’s composition and decision-making processes were not sufficient to allow the bank to make policy decisions, strategies and judgments effectively.

It then made 51 recommendations to improve the decision-making process of the RBA, its corporate governance structure and monetary policy process, as well as the accountability and transparency of its board and leaders.

Two Separate RBA Boards

At the core of the review is the recommendation for establishing two separate boards. One is in charge of governing the central bank, and another is responsible for setting interest rates.

The new “Monetary Policy Board”, with members having greater economic expertise, is expected to have eight monetary policy meetings a year so that it can have more time to consider monetary issues and engage with RBA staff.

In addition, the review suggested the RBA be more transparent in its monetary policy processes by holding press conferences after each meeting and allowing its board members to speak to the public about the bank’s policies on more occasions.

There is also a need to establish two new positions: a chief communications officer, whose role is to strengthen the bank’s communication, and a chief operating officer, who focuses on improving systems and processes within the RBA.

The above reforms aim to enhance the central bank’s leadership and decision-making and help prevent communication missteps, such as when the governor indicated that interest rates would remain unchanged until 2024 in 2021.

Governor of the Reserve Bank of Australia Philip Lowe makes a speech in Sydney, Australia, on March 19, 2020. Brendon Thorne/Getty Images

Regarding monetary policies, the review agreed that the central bank should maintain a flexible inflation target of two to three percent.

However, it suggested that the RBA should have dual monetary policy objectives of price stability and full employment and give equal consideration to each.

“The economic prosperity and welfare of Australians now and in the future should be an overall purpose for the institution,” the review said.

Another major change recommended by the review is the removal of the RBA’s power to direct lending policies of private banks, as it no longer has supervisory responsibilities for the banking sector.

At present, Australian banks are licensed and supervised by the Australian Prudential Regulation Authority, which is responsible for maintaining the financial system’s safety and stability.

The review also called on the government to reaffirm the independence of the RBA by removing the treasurer’s power to override the bank’s decisions.

The Government’s Next Steps

Following the review’s release, the government said it agreed in principle with the recommendations and would work with relevant parties to implement them.

Three areas of change outlined by the government are reinforcing the independence of the RBA, separating the monetary policy board and governance board, and clarifying the dual objectives.

Treasurer Jim Chalmers said the review’s recommendations and the government’s response aimed to provide the RBA with the best frameworks, objectives, processes and expertise.

“The review found that Australia’s monetary policy framework has contributed to good economic outcomes over the past three decades but identified a number of opportunities to strengthen it,” he said in a statement.

“Australia faces a complex and rapidly changing environment, and we need the most effective central bank and monetary policy framework to meet current and future economic challenges.”

Australian Treasurer Jim Chalmers delivers his budget address in Canberra, Australia, on Oct. 25, 2022. Martin Ollman/Getty Images

Shadow Treasurer Angus Taylor expressed willingness to support sensible reforms, saying that the direction of the review had been positive.

“There have been real mistakes made by the Reserve Bank in recent times, and they’re laid out clearly in the review,” he told ABC radio.

“People have paid a high price for those areas, whether it’s households or businesses across Australia. And we don’t want to see those repeated.”

RBA’s Response

RBA governor Philip Lowe welcomed the review and said that the bank would constructively work on the recommendations to ensure that they strengthen the central bank and the way it operated.

“The review panel rightly acknowledged the substantial contribution the bank has made to Australia’s economic success and the skills and dedication of the staff,” he said in a statement.

“The recommended changes will build on that strong foundation and strengthen the bank’s governance and decision-making processes.

“They will help us deal with the complex world in which we operate as we strive to promote the economic welfare of the Australian people.”

Meanwhile, the treasurer has appointed two new RBA board members, Iain Ross and Elana Ruben, who will replace Wendy Craik and Mark Barnaba.

The new and current existing members are expected to be assigned across two new boards if the parliament legislates the changes in mid-2024.