What does the recent review of the Reserve Bank of Australia mean for you?

By Lena Ridley, CEO, Profile Financial Services and Heidi Liling, Associate Director, Investments, Willis Towers Watson

On the 20th of April, the findings, and recommendations of a historic independent review of the Reserve Bank of Australia (RBA) were released. This was a comprehensive look under the hood of Australia’s central bank, turning the spotlight on performance of the monetary policy decision-making processes and framework over the last decade, as well as the bank’s own internal governance and processes.

The review makes 51 recommendations focused for the most part on improving on the inputs used in cash rate decision making and ensuring greater clarity for the public around the rationale of rate decisions. The governmental response is initially supportive, and all recommendations have been agreed with in principle by Australian Treasurer, Jim Chalmers.

Key Recommendations

Leadership Structure

• The review recommends an overhaul of the leadership structure of the bank.
• Most significantly, the review panel recommended the abolishment of the current board and the subsequent establishment of two separate boards.
  • One monetary board with the sole purpose of setting monetary policy (cash rate decisions) and
  • Another board responsible for overseeing the bank’s day-to day management and governance.
• It has been conceded that the current setup falls far below contemporary best practice standards, and this move would align the RBA with other central bank peers including the Bank of England and the US Federal Reserve

Monetary Board Meetings

• The review recommends revising the frequency of the monetary board meetings from 11 times to eight times a year.
• It also emphasises the need for greater transparency from the board around its decision making, with the following recommendations:
  • A press conference should follow each monetary policy meeting as well as a written statement.
  • Unattributed votes on decisions be published.
  • The bank should release more of the research and data that form the basis of interest rate decisions.

Board Composition

• Shortcomings were found within the composition of the current board, noting specifically the limited challenge the board was able to provide to the RBA executive’s view and that the skill set of members was misaligned to that of the complex environment in which monetary policy will likely sit going forwards.
• The review recommends appointing an “expert” monetary policy board with a majority of external members with diverse perspectives and knowledge who individually have expertise directly applicable to the challenges of rate setting to create a meaningful counterbalance to internal bank member influence.

Objectives of Monetary Policy and the Inflation Target

• The review recommended that the RBA have dual monetary policy objectives of price stability and full employment, with equal consideration given to each.
• The review also recommended that the current third objective of monetary policy – the economic prosperity and welfare of Australians now and in the future – should be reframed as an overall purpose for the RBA, rather than an explicit objective of monetary policy
• The review recommends retaining the flexible 2-3% inflation target, noting that this framework has typically worked well over the last three decades and is well understood in Australia
• The review does take exception with the current wording of the inflation target, that is that inflation should be between 2 and 3 percent ‘on average, over time’ noting that that this wording makes it difficult to evaluate whether the target is being met
• The review pushes for improved clarity around how the bank uses this flexibility and recommends that the RBA explain how quickly it expects to return inflation to around the midpoint of the target, its assessment of full employment and how any financial vulnerabilities it identifies have impacted its decision.

Culture

• A cultural overhaul was recommended to create an environment where staff can constructively debate, and challenge leaders’ views on the basis that fostering an environment supportive of diverse perspectives and views will ultimately lead to better outcomes and decisions.
• The review also stated that the bank should empower its people by improving transparency and feedback around career progression and opportunities.

Impacts for Profile clients

We support the view of our asset consultants, Willis Towers Watson in their belief that these changes will not have a material impact on financial markets – with the review broadly endorsing the RBA’s existing inflation targeting approach and its current 2-3% target inflation range. This view aligns with the lack of any real reaction to the release of the report from local bond and equities markets.

We are encouraged by the push to promote a more robust and transparent decision-making framework with respect to monetary policy. The creation of a separate and larger Monetary Policy Board is a sensible way of encouraging greater debate and a broader contribution of views – though we would caution against expectations that this will generate meaningfully different policy settings than the current approach does. And the push to provide greater public reporting of the Board’s decision-making process and voting records, coupled with an increase in the number of regular press conferences and speeches by Board members is a noble attempt at repairing public confidence in the RBA following the harsh criticism of Governor Lowe’s approach to providing forward guidance on monetary policy in recent years.

It is therefore unlikely that the changes will foster direct portfolio implications for Profile clients. As always though, please discuss any thoughts you have with your Adviser at your next review.

Clients interested in a deeper dive can access the full report here An RBA fit for the future (rbareview.gov.au)