Reserve Bank revolution: how Jim Chalmers will recraft the RBA for the 21st century
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Thursday, April 20, 2023
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The review into the Reserve Bank of Australia has just been published by Treasurer Jim Chalmers, and it’s a blockbuster. The review has made 51 recommendations including: Chalmers offered in-principle agreement to all 51 of the panel’s recommendations and would be seeking support from the Opposition for any legislation needed to implement them.
Key Points:
The review into the Reserve Bank of Australia has just been published by Treasurer Jim Chalmers, and it’s a blockbuster. The review has made 51 recommendations including:
- Chalmers offered in-principle agreement to all 51 of the panel’s recommendations and would be seeking support from the Opposition for any legislation needed to implement them.
- The review has briefed Opposition Treasury spokesman Angus Taylor on its thinking.
What was the problem?
- As a result, wage growth was too low and unemployment too high.
- The most likely explanation is that the bank was focused too much on stabilising the financial system and too little on boosting the economy.
- But the underlying problem – that the board was populated by monetary policy amateurs rather than experts – remained the same.
- But the bank board ignored this advice and instead set out a three-year projection for how long rates would stay low.
Culture club
- The review says former and current staff have told it the bank’s culture is hierarchical and risk-averse.
- Accordingly, the review has recommended that the bank improve its culture by appointing a chief operating officer with a mandate to open up the bank up to new ideas and staff and break down silos within the bank.
What’ll this mean for rates?
- Rates will remain high for as long as inflation is projected to stay above the 2-3% target band.
- The review considered whether or not the 2-3% target remains optimal and concluded that it does.
- It considered alternatives such as a higher inflation target or targeting nominal gross domestic product, and found them lacking.
What about RBA Governor Philip Lowe?
- A review that found the bank was in good working order would have been a good reason to reappoint the present governor, whose five-year term ends in September.
- The scale of the changes recommended by the review is large – there is an entire section devoted to a year-long implementation process.