The changes that are happening at the Reserve Bank of Australia are the biggest they have been in 30 years. In 2023, Treasurer Jim Chalmers ordered a review of the RBA. The outcome of this review consists of 51 recommendations in a 280+ page report called “A RBA Policy Fit For The Future“. In response to this review, the RBA is changing the way it holds meetings and makes decisions. It is also changing the way it communicates and operates.
Is this RBA review a big deal? The answer is yes and no. On one hand, there are critics that say that nothing was actually broken and so the changes are not necessary. On the other hand, there is debate on either sides arguing that the changes are “radical” vs that the changes are just a way that the central bank is evolving. So should you care about the changes? We think the answer is: YES, you should care. In this article, I am going to explain how the overhaul at the RBA will impact you. This is especially if you already have a mortgage now.
The Context of the RBA Review
The RBA has not been subject to as much public scrutiny for along while as it has during the pandemic. In the last 20 years, Australia went through a period of uninterrupted economic prosperity. Many people have attributed this period to a well-functioning central bank. It wasn’t until the covid pandemic when the RBA’s activities came into the spotlight.
To prop-up the economy during an unprecedented health and economic crisis, the RBA slashed interest rates. The official cash rate went all to way down to a historic low of 1%. It can be said that the RBA adopted unconventional monetary policies that overstimulated the economy.
The then RBA governor Philip Lowe gave “forward guidance” by advising the Australia public that interest rates would remain low until at least 2024. Many Australian home buyers took up new loans on cheap debt. This, as we have seen, has led to property prices reaching new heights in 2021-2022.
Mr Lowe later advised that what he had said before was a conditional statement. It was not meant to be an expectation or a promise.
As we already know, the economic reality played out quite differently. Inflation surged past 7%, causing consecutive rate hike decisions and the steepest hiking cycle in 30 years.
The cash rate went from 0.1% to 4.35% between April 2022 and November 2023.
Many home buyers who took up a home loan are facing a stark increase in monthly repayments. This adds to the rising cost of living pressures faced by all Australians.
Against this backdrop, the treasurer caved to public pressures in July 2022, and announced a wholesale review of the RBA. The outcome was a report outlining 51 recommendations for changes at the RBA.
The treasurer announced that the Albanese Government would accept all recommendations and that he had unanimous support from the opposition.
The Key Changes in the RBA Review
The 51 recommendations can be summarised in 7 key points, under 3 themes:
1. Clearer Monetary Framework
One. Dual Mandate of Price Stability & Full Employment (1.2) given equal weight (2.1)
Two. RBA should aim for the “midpoint” of the 2-3% flexible inflation target (2.1)
2. Improved Decision Making
Three. Formation of a Monetary Policy Board (8.1) & Governance Board (12.1)
Four. MP Board will have 9 members, 6 external (8.2) with expertise in macroeconomics, the financial system, labour markets and supply side of the economy (8.4)
Five. 8 meetings not 11 (9.1)
3. Improved Communication & Improved Accountability
Six. Press conference after each Monetary Policy Decision (10.1) & public engagements by external members (10.2)
Seven. Cash rate decision signed off by MP Board with unattributed votes (10.3)
Pros & Cons – the Two Sides of the Debate
At face value, the advantages of the review are many. This includes a clearer mandate, with better wording and less ambiguity or confusion.
There will be an alignment to international best practices, with more relevant expertise added to the board, who will have more access to RBA staff and resources.
The change from 4 to 6 weekly meeting cycles gives the board more time to consider data and diverse perspectives, ultimately allowing for better decision making. More time in between meetings also may be better for borrowers, giving them more time to adjust to each home loan rate change.
Each decision will also be explained more clearly, enhancing public awareness and ensuring greater transparency in monetary policy.
On the other hand, critics of the RBA review such as former RBA governor Ian Macfarlane argues that the recommendations are “radical”. He argues that there was no opportunity for public debate.
Mr Macfarlane has made several criticisms in the press and national TV. One of these is the treatment of employment and inflation equally, arguing for a singular focus on inflation to guide monetary policy.
There is also some apprehension about the composition of the board. The shift towards entrusting monetary policy’s voting power predominantly to external members. The concern is that the board could be filled with academics.
There is also a worry that the dynamics of power in the board is disadvantageous to the governor. With a majority of them being part-time, external members, the worry is centred around the potential for the governor to be outvoted, and challenged to the robustness of their leadership.
Another disadvantage might be that the longer time in between rate decicions could make monetary policy less agile.
Lastly, the issue of accountability has also been raised by Mr Macfarlane. Without a specific individual, like the governor, signing off on monetary policy decisions, critics worry about a diffusion of responsibility. This could lead to situations where the governor must defend decisions she didn’t support, blurring the lines of accountability.
In the next post, we’ll be looking at where interest rates are headed in 2024, especially in the context of the RBA overhaul.
Some of the changes that do not require legislative amendments have already been implemented. Changes that need to be passed through parliament are required to be passed by mid-year 2024.
It was a monumental review of the RBA, and the changes are coming in quickly.
Please stay tuned for more on this topic, as well as upcoming video explaining these changes.
Thank you for reading!