Review of the RBA Review

Review of the RBA Review

Jash Sant
RBA Reviewmonetary policyGovernance
June 19, 2023

The Royal Burden on Australians, better known as the RBA, has just come out of the magnifying glass. It has been investigated, basically interrogated, by the Treasury of Australia, with the purpose of ensuring “strong macroeconomic outcomes for Australia”.

The review came with plenty of questions from everyday Australians, that were conveniently handled with political disguise and jargon. Why was the review conducted? How is it going to affect the economy and mortgage holders? What is the behind-the-scenes gossip? Let us see if we can answer some of these questions beyond the patented “this will be good for us”.

Amidst decade high inflation figures that reached a 30 year high in the December quarter of last year at 7.8% (30.4% annualised!), it was simply necessary for the government to react. Some of the recommendations made by the Review Panel included:

  1. The creation of separate boards for monetary policy setting and governance (currency reserves, payments system, banking services for the government, etc.),
  2. The appointment of a Chief Operating Officer whose role will be to enhance communication,
  3. Reduce the number of meetings in a year from 11 to 8.

While there were several other minor, technical changes these 3 will have the biggest impact on the structure of the Bank and effect on us all.

The recommendation to split the Board into two is surely not all that big, as it is a purely structural change that we shouldn’t care about, right? To come to that conclusion let’s understand how the current Board works.

There are 9 members on the Board, of which three are the executives (Governor, Deputy Governor, and Secretary). Decisions on setting the cash rate are made based on various data and indicators, which the Board deliberates on during 3.5 hour meetings. After the discussion, democracy takes over and the Board votes on 2 proposals that may have come out of the meeting, with the Governor having an extra tiebreaker vote if needed. The minutes are then published 2 weeks later. Overall, it is a sound and secure process that shouldn’t really need any tweaking.

The Review has suggested the below changes to the status quo.

There will be a Monetary Policy Board, which will be for the sole purpose of setting cash rates. The structure of this Board will be the same, however there has been the call to appoint Board members based on the traditional application and interview process rather than appointment. Apparently, the Board members and the Governor are appointed by the Treasurer… whatever happened to the RBA’s “cherished independence”(Jim Chalmers, 2023)? This move is however a step in the right direction for the RBA to run solely by its own charter, to “preserve the integrity of the Australian dollar”. It is not exactly the full solution for economic stability either though.

The macroeconomy is directed by monetary policy (RBA) and fiscal policy (Government). Based on the economic cycle, the stance of these policies often matches. For example, during the recession in 2020, the record low interest rates designed to encourage spending were matched by the heavy government spending on JobXXXXers. In fact, it is quite important for the two policies to complement each other, as monetary policy mainly targets the demand side while fiscal policy has the ability to work on the supply side as well. Thanks to Australian democracy, there already seems to be a level of independence to the RBA, evident through the current see-saw between the shooting interest rates and the cannoning government spending. If this gun fight goes on any longer, it probably would end with the citizens’ Waterloo.

The point here is, the RBA is already acting quite independently, would cutting it even more slack actually be of any help?

Another big talking point from the Review was the proposed reduction of annual meetings from 11 to 8. Once again, this seems like a simple schedule change, but it could actually influence the policy a fair bit. In macroeconomics, a term known as impact lag, is used when analysing the implications of wide scale policy such as the changing of the cash rate. Basically, it just means that the economy’s behaviour (spending vs saving, response to incentives etc.) take some time to react to the policy change, mainly due to there being imperfect liquidity. 8 meetings a year compared to 11 might give the Board additional data in between the decisions to start seeing the impact of their last meeting. This could be a boon for mortgage holders, as the interest rate hikes will have more chances of being delayed or even cancelled based on the economic response. However, the reverse is just as true. So, take that sigh of relief carefully.

Overall, the changes recommended by the Panel seem to be grounded in economic logic. Despite this, there are possibilities of unintended consequences. The decision to split the Board could result in a greater dissonance between monetary and fiscal policy. On the other hand, the reduction in frequency of the meetings may ease the tightening of the interest rates and give the decisions a bit more information.