RBA set for split
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The Reserve Bank of Australia (RBA) is undergoing its most significant restructuring in decades.
New legislation is creating separate boards for monetary policy and governance, and is designed to sharpen the focus of Australia’s central bank after years of criticism over its decision-making processes.
This reform splits the RBA’s current board into two.
One board will focus exclusively on setting the cash rate, while the other will oversee governance matters, such as staffing and IT.
The changes follow a landmark independent review, which concluded in March 2023, and align the RBA’s structure with some global counterparts, such as the Bank of England.
The government’s push for these reforms initially struggled to gain traction, with bipartisan opposition and fears the changes would stall indefinitely.
Concessions, however, saw the legislation finally pass.
The reforms aim to tackle concerns that the existing board was too passive, often endorsing recommendations from the governor without sufficient scrutiny.
The review noted that no executive recommendation had been rejected in at least a decade and urged the creation of a board “proactively shaping policy decisions” rather than serving as an advisory body.
These claims have been contested.
Former Governor Philip Lowe described them as far removed from his experience.
“The idea that the board members sit there meekly and accept the recommendation that I put to them is very far from the reality that I’ve lived as the governor,” Dr Lowe said in April 2023:
Recent board member Mark Barnaba echoed this, asserting that the board did not simply “rubber-stamp” decisions.
The new monetary policy board, which will oversee cash rate decisions, will include the governor, deputy governor, treasury secretary, and six external members.
These members must dedicate substantial time to their roles, leading some, including former board member John Edwards, to warn the positions may skew towards academics rather than corporate experts.
While the changes are expected to enhance scrutiny, they may not dramatically alter policy outcomes.
Since 2011, the RBA shadow board - an independent panel of economists - has recommended similar cash rate settings to those implemented by the official board, with an average difference of just 0.05 percentage points.
With Australia’s cash rate currently at 4.35 per cent, its highest since 2011, questions persist about whether the reforms would have led to different rate decisions.
Historical patterns suggest that employment and inflation outcomes would likely have remained similar.
To ensure the changes passed the Senate, the government abandoned two controversial recommendations.
One was removing the treasurer’s power to veto RBA decisions, a provision dating back to 1945 that has never been used.
The other was ending the RBA’s authority to direct banks’ lending policies, a power considered dormant for decades.
While the ultimate impact remains uncertain, the reforms are likely to be some of the most closely watched changes in the RBA’s history.
