After a flurry of 11th-hour deal making with the Greens and Senate independents David Pocock and Jacqui Lambie, the legislation to overhaul the Reserve Bank (RBA) was secured.
The reform was part of a broader legislative package of over 30 bills passed late Thursday – other significant measures included the Future Made in Australia Bill to bolster domestic manufacturing and the objective of superannuation reform aimed at safeguarding Australians’ retirement savings.
Originally slated to take effect on 1 July, the legislation implementing the findings of an independent review into the RBA has been delayed in the Senate.
The reforms appeared to be on the brink of collapse just months ago when the Coalition withdrew its support in September, expressing concerns that the government aimed to “sack and stack” the central bank with Labor-aligned appointees.
That’s when the Greens stepped in, initially pushing for Treasurer Jim Chalmers to implement an immediate interest rate cut – a proposal the government firmly rejected.
On Thursday, however, the Greens appeared to abandon their demand for a rate cut, but they succeeded in securing the retention of Section 36 of the Banking Act, which allows the RBA to direct banks’ lending activities, as well as Section 11 of the RBA Act, which grants the government the power to override the RBA’s interest rate decisions.
What happens next?
Several recommendations from the review have already been put into action by RBA governor Michele Bullock without the need for legislation.
These changes include reducing the number of board meetings from 11 to eight per year and introducing a requirement for the governor to hold a press conference following each interest rate decision.
The newly passed reforms will split the RBA into two separate boards – one focused on interest rate decisions and the other on governance.
Should the legislation be granted royal assent by Governor-General Sam Mostyn this week, the dual-board structure could be implemented by as soon as 1 March, according to the transition details specified in the reform.
This restructuring essentially grants Treasurer Jim Chalmers the authority to appoint several members to the new interest rate-setting board before the next federal election.
While the government argues that this will bring greater expertise and accountability to monetary policy, the move is expected to attract criticism from the opposition.
Coalition members have already accused the government of trying to stack the RBA with Labor-aligned appointees, fuelling concerns that the central bank could be politicised.
In a statement on Friday morning, shadow treasurer Angus Taylor said: “By voting with the Greens on the Reserve Bank rather than accept the Coalition’s clearly articulated red line issues, the Treasurer has confirmed he aligns with calling for the RBA governor to be sacked; calling for the RBA to direct Australian businesses access to finance; calling for climate change to determine whether Australians should face higher interest rates.
“The Treasurer would rather associate himself with these views than guarantee the independence of the existing Reserve Bank board.”
What do economists think?
AMP’s Shane Oliver has been a vocal opponent of parts of the RBA overhaul, including the dual-board structure. Speaking to InvestorDaily recently, the chief economist said that a two-board system could lead to a takeover by “egotistical economists”, threatening to overshadow the Reserve Bank and skew its decisions.
“There was no evidence provided to suggest that an independent rate setting board is world best practice. There was no evidence provided that it would lead to better outcomes in Australia. There was no evidence provided that the Reserve Bank has been making major mistakes,” the chief economist said.
“I think the best approach is to call it quits and work in a bipartisan way to strengthen the process of appointing board members to the existing board in the future.”
Oliver’s colleague, AMP’s deputy chief economist Diana Mousina, also opposes dismantling the current RBA board, arguing that doing so just before the central bank may begin cutting interest rates “doesn’t seem right for policy settings”.
In a market note published a couple of months ago, Mousina reminded that “there is no evidence that having a dual board structure would improve how the central bank sets policy” – a point raised earlier by Oliver.
“The review indicated that having a specialist monetary policy board would allow more debate within the board meetings, as in the past decade the board has always voted with the RBA recommendation.
“The RBA has always, arguably, always has more independence to its board compared to other global central banks because they have a higher share of externals on the board,” Mousina said.
For instance, she noted, the Federal Reserve maintains a board composed entirely of internal members.
“Having external part-time board members who are very opinionated about monetary policy, voting in the meetings (with the votes being published) and speaking at events could end up seeing the externals with more power than the RBA, which could diminish the value of the RBA institution, who has been tasked with the job to set interest rates,” the deputy chief economist said.
“This whole drama around seems like noise and has little implications for actual interest rate settings.”
While many others have argued that these changes bring unpredictability to the RBA’s future decisions, GSFM investment strategist Stephen Miller likes the dual board structure, and has previously suggested a balanced model that includes both bank staff and independent experts would ensure effective decision making.
A similar suggestion was made by Challenger’s Jonathan Kearns who suggested a monetary policy board made up of five bank staff and four independents.
How the RBA feels
Just minutes before the reform made it through the Senate, governor Michele Bullock was asked how she views the changes at a CEDA event, where she had a largely optimistic outlook.
Bullock highlighted that the RBA has already been moving towards a two-board system, and that having a governance board would help alleviate some of the pressure placed on her under the current model.
“There’s a lot that we do that isn’t related to monetary policy. At the moment I am accountable for all of that, I am the accountable authority, not the board. Under the new framework, the governance board would be accountable for the operations of the bank," Bullock said.
“We’re already leaning into some of these changes," the governor added, reminding the audience that some of the review’s recommendations didn’t need to be legislated. “There’s clearly going to be some structural [changes], but I think the monetary policy board, we’re already moving in that direction so we’ll just keep [...] being agile.”
