A new specialist board to manage monetary policy at Australia’s central bank will give independent expert members more ability to determine interest rates, diluting the bank’s traditional power over policy.
On Thursday, the Reserve Bank of Australia (RBA) released a 272-page assessment proposing fewer policy meetings, a more focused mandate, and a separate board for operations.
The RBA’s new Monetary Policy Board (MPB) will maintain its independence from the government and its flexible inflation target of 2% to 3%, boosting market confidence.
Like most major central banks, it would aspire for policy transparency and a simplified dual mandate of price stability and full employment.
The existing mandate for Australian economic growth and welfare is unique among central banks.
Treasurer Jim Chalmers confirmed the in-principle agreement to all 51 suggestions from the review he set up in July to make the RBA “fit for the future.”
Chalmers told a media conference that the report’s recommendations would strengthen the Reserve Bank’s independence.
The RBA and its head were heavily criticized for sharply raising rates to tackle runaway inflation. In addition, many central banks have been criticized for their market and public policy communication.
RBA Governor Philip Lowe praised the assessment and indicated that the current board would explore implementing some ideas. July 2020 will see the entire recommendations.
The RBA’s board should be separated into monetary policy and governance, with an external chair to oversee operations, including human resources, finance, and technology.
The MPB would include the RBA governor, deputy governor, Treasury Secretary, and six external members with experience in macroeconomics, finance, labor markets, and supply-side economics.
The current board has six external members, although they are mostly businesspeople, and the assessment questioned their economic competence.
The assessment suggested that the MPB meet eight times yearly instead of 11, following international norms. The initial unattributable voting record would include disagreements.
Policy communication is the governor’s and deputy governor’s responsibility.
“It takes some power away from the governor, I think that’s probably the biggest change,” said Westpac senior currency strategist Sean Callow. “The governor tells us the RBA’s view.”
“So it would be very interesting if we have some external members who come in and make comments that are not so much in line with what the governor is saying.”
Lowe was criticized for telling borrowers in 2021 that interest rates would not rise until 2024.
In May 2018, the bank raised rates by 350 basis points to 3.6% due to higher-than-expected inflation.
Lowe’s seven-year term ends in September and may not be extended like his two predecessors.
Chalmers said Lowe’s appointment would be decided midyear. Lowe told reporters he would accept another term but would understand if the government selected someone else.
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