RBA to Set Up New Board for Interest Rates, Scrap Treasurer’s Overruling Powers

A pedestrian walks past the Reserve Bank of Australia (RBA) head office in Sydney, Australia, on March 1, 2022. AAP Image/Bianca De Marchi

The Reserve Bank of Australia (RBA) will have a new board solely responsible for setting interest rates, while the treasurer will no longer have the power to override the central bank’s monetary policy decisions.

Australian Treasurer Jim Chalmers on Nov. 27 announced a suit of reforms to strengthen and modernise the Reserve Bank was coming to parliament this week under the Treasury Laws Amendment (Reserve Bank Reforms) Bill 2023.

This is the centre-left Albanese government’s response to a major RBA Review in April, which was a culmination of extensive consultations with RBA board members and staff, and experts.

The legislation stipulates that the RBA’s overarching goal is to “promote the economic prosperity and welfare of the people of Australia, both now and into the future.”

Among the recommendations to be implemented by the government include establishing a dedicated monetary policy board to set the target cash rate and a governance board to oversee the Reserve Bank’s operations.

In a bid to reinforce the RBA’s independence, the reforms will strip the treasurer of the power to overrule its monetary policy decisions.

The new bill will also scrap the central bank’s monthly meeting and replace it with eight meetings a year.

In addition, it will permit members of the monetary policy and governance boards to extend their terms by two years after serving for a maximum of five years.

This aims to give the boards more flexibility in making sure they have struck the right balance between experience and renewal.

“We want to ensure Australia’s central bank remains world class with a monetary policy framework fit to meet our current and future economic challenges,” Mr. Chalmers said in a media release.

“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.”

The government and the Reserve Bank will finalise a new statement on the conduct of monetary policy in December.

New RBA Governor On Interest Rate Pain

The sweeping reforms were made weeks after Mr. Chalmers announced the newly appointed RBA chief, Michele Bullock, would oversee the governance and the monetary policy boards.

Ms. Bullock has previously described the country’s inflation problem as “increasingly homegrown and demand-drive” as she indicated further interest rate rises might be needed.

She noted that while wages, business rents, and energy bills were increasing, unemployment remained low.

“Supply chain effects were certainly evident in goods prices and, like overseas, we are observing an easing of these pressures,” she said.

“The energy price impacts didn’t hit us at the same time as other countries, but we also saw electricity and fuel prices rise sharply.

“This shift from mainly supply-driven to mainly demand-driven inflation has been a part of our inflation outlook for some time.”

Ms. Bullock said the shift in inflation’s nature was a significant matter for the RBA’s policy response.

“I receive letters from people who are finding it difficult to make ends meet and I speak with organisations that assist struggling households,” she said.

“Everyone is seeing prices for goods and services rise strongly but this has a particularly severe impact on low-income households.

“This emphasises the need to get inflation back down.”

Alfred Bui contributed to this report.