A major RBA review has called for major changes to the institution’s operation.
The review found the RBA board lacks sufficient expertise to make interest rate decisions and that its internal culture does not encourage debate.
Treasurer Jim Chalmers has accepted all its recommendations in principle and the Opposition is also supportive. RBA Governor Philip Lowe has supported some recommendations but defended the board’s performance.
About the RBA
The Reserve Bank of Australia (RBA) is Australia’s central bank. The main job of a country’s central bank is to support economic stability and wellbeing. Most central banks operate independently of politicians, although politicians set the laws which guide them.
Their main tool to influence the economy is setting the ‘cash rate’ – an interest rate for banks that affects the cost of borrowing money across the economy.
The RBA is required by law to use the interest rate to achieve low, stable inflation, targeting 2-3%. It updates the rate every month except January at a board meeting led by its Governor.
The RBA’s Balancing Act
When setting interest rates, central banks have to juggle two competing considerations.
One is inflation: as we’re seeing now, high inflation can have bad consequences. Raising interest rates discourages borrowing and by extension discourages spending, intended to ‘cool off’ rising prices.
The other is unemployment: if rates are too high and spending is discouraged too much, that means fewer jobs. If a central bank goes ‘too hard’ on inflation, there can be unnecessary unemployment.
Criticisms of the RBA
The RBA has faced two key criticisms in recent years:
First, from 2016-19, some experts said it kept rates too high and pushed inflation too low. Economists believe these high rates kept hundreds of thousands of people out of work.
Then, during COVID, Governor Lowe said the RBA did not expect to raise rates until 2024. When inflation unexpectedly arrived, the RBA was slower to adjust than many other central banks around the world. Recent rate rises have left some feeling the RBA ‘broke its promise’ to leave rates unchanged.
RBA review
The idea of an independent RBA review was first raised by former Treasurer Josh Frydenberg and set up by new Treasurer Jim Chalmers. It is the first external review of the RBA in four decades.
It has made 51 recommendations. Chalmers says he supports all 51 in principle but will work through the best way to implement them in cooperation with the Opposition. Shadow Treasurer Angus Taylor has spoken favourably about the review and welcomed “a spirit of bipartisanship”.
Board expertise
The review said the RBA’s board needs more specialist expertise. Board members are typically drawn from the business community. The review suggests they have not been equipped to debate and challenge the Governor.
It recommended setting up two boards: one to manage the organisation like any other company board, and one with specialist technical expertise to make interest rate decisions.
Culture and debate
The review also criticised a culture of “groupthink”, noting many RBA staff complained they were afraid to challenge the opinions of their superiors because of the bank’s “hierarchical” culture.
The review was especially critical of the RBA’s leadership and flagged a need for better feedback processes and ways to hold leadership accountable for ensuring staff members feel “safe… to speak up and challenge the status quo”.
Transparency
A third key recommendation was that the RBA become more transparent.
The review recommended the Governor hold a press conference after every interest rate decision and provide clear information on alternatives considered by the board.
It also recommended the RBA employ a communications expert, noting that when Lowe stated he did not expect to raise rates until 2024 there was limited internal discussion about the risk this might be interpreted as a ‘promise’.
Focus on jobs
A fourth key recommendation is to explicitly add a target for low unemployment alongside the existing target for low inflation of 2-3%.
The RBA already considers unemployment indirectly when it makes interest rate decisions.
However, the review suggested that making this more explicit would give the RBA more flexibility to balance inflation and unemployment appropriately.
