how Jim Chalmers will recraft the RBA for the 21st century
- Written by Isaac Gross, Lecturer in Economics, Monash University
The review into the Reserve Bank of Australia has just been published by Treasurer Jim Chalmers, and it’s a blockbuster[1].
The review has made 51 recommendations including:
taking away power over interest rates from the Reserve Bank board (which has traditionally been dominated by non-economists, usually corporate executives) and devolving it to a panel of experts
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reducing the number of decision-making meetings from 11 to eight per year
boosting the transparency of its decision-making process and holding it more accountable for those decisions.
Chalmers offered in-principle agreement to all 51 of the panel’s recommendations and said he would be seeking support from the Opposition for any legislation needed to implement them. The review has briefed Opposition Treasury spokesman Angus Taylor on its thinking.
Chalmers set up the three-person review[2] in July 2022, appointing Carolyn Wilkins, a former senior deputy governor of the Bank of Canada, Renée Fry-McKibbin, of the Crawford School of Public Policy at the Australian National University, and Gordon de Brouwer, a specialist in public sector reform.
What was the problem?
While the apparent nature of the problem has changed over time, its root cause remains the same.
When the concept of the review was first mooted in 2020, the economy was in a bad state with inflation well below the bank’s target band of 2-3% and economic growth anaemic.
As a result, wage growth was too low and unemployment too high.
The most likely explanation is that the bank was focused too much on stabilising the financial system and too little on boosting the economy.
The bank was setting interest rates using its gut instead of its brain, in an almost literal sense – it was not doing what its computer model suggested it should do[3].
Reserve Bank Governor Philip Lowe.
Mick Tsikas/AAP
What about RBA Governor Philip Lowe?
A review that found the bank was in good working order would have been a good reason to reappoint the present governor, whose five-year term ends in September.
The scale of the changes recommended by the review is large – there is an entire section devoted to a year-long implementation process.
The government might well decide that Lowe is the right person to carry out that process and that his term should be extended rather than dropping his successor into the middle of it.
However Chalmers plans to handle it, the review he commissioned has ushered in a revolution at the bank – one that will hopefully make it stronger, smarter and better-placed to serve the Australian people.
References^ blockbuster (rbareview.gov.au)^ three-person review (ministers.treasury.gov.au)^ suggested it should do (theconversation.com)^ RBA Review (rbareview.gov.au)^ until 2024 (www.rba.gov.au)^ The RBA's failure to cut rates faster may have cost 270,000 jobs (theconversation.com)
