Strip RBA board of rate-setting power: review SMH - Shane Wright Nov 9, 2022 116 comments
The Reserve Bank
board would be stripped of its power to set interest rates and forced to explain
why it fails to hit its inflation target, while senior staff would be barred
from holding shares or government bonds under sweeping proposals put to the
inquiry examining the institution.
Former RBA economist Zac Gross, whose research into the bank’s pre-COVID interest rates settings found up to 270,000 jobs failed to be created due to overly tight monetary policy, said a committee of experts should set interest rates rather than a board of “corporate leaders” with little economics experience.
The Reserve Bank board would lose its power to set interest rates under a proposal that would shift the responsibility to a separate expert committee.
Gross also has called for the Reserve Bank to take macroprudential powers back from the Australian Prudential Regulation Authority (APRA), so it can target issues such as soaring house prices without having to resort to interest rates.
The review, the first of the RBA in more than 40 years, is being led by a three-member panel that includes international monetary policy expert Carolyn Wilkins, who sits on the Bank of England’s financial policy committee; the interim director of the Crawford School at the Australian National University, Renee Fry-McKibbin; and the secretary for public sector reform Gordon de Brouwer.
Submissions to the review closed on Monday. It is due to report to Treasurer Jim Chalmers by the end of March next year.
‘Crucial but not beyond reproach’: The case for a review of the RBA
Gross, an economics lecturer at Monash University, said changes were needed to how the RBA set monetary policy because it had failed over recent years.
“The status quo, in which monetary policy is set by a board mostly composed of corporate leaders with no experience in macroeconomics, has served Australia poorly,” he said.
“It has led to persistent policy errors, poor communication, low transparency and does not reflect best practice amongst peer central banks.”
Accordingg to Gross, the Reserve Bank is unusual among the world’s central banks as its board oversees both the day-to-day operation of the institution as well as the setting of monetary policy.
Gross said the board, of which six of its nine members are appointed by the treasurer of the day, should continue to oversee the bank, but a separate monetary policy committee of experts should set interest rates.
The RBA has failed to hit its inflation target across the past seven years.
This would bring it into line with central banks such as those in New Zealand,
England and Canada.
The committee would include five RBA economists plus four outside experts. The votes and reasoning of committee members would be made public after meetings, which would be reduced from 11 to eight a year.
The RBA’s charter commits the bank to control inflation, full employment and policies which promote “the economic prosperity and welfare of the people of Australia”.
The central bank under fire: Has the RBA failed Australians?
A criticism of the bank has been in its failure to hold inflation in its 2-3 per cent target band. It has been under and above the band for almost all of the past seven years.
Gross said the RBA should commit to get inflation to the midpoint of its target band within two years. If it does not, then the bank would have to make public why it has failed to hit its target.
Last week, new Reserve Bank forecasts for the next two years fail to show inflation reaching its target.
The bank also, along with APRA, has responsibility for the stability of the nation’s financial system.
Macroprudential regulations, such as requirements on interest rate buffers or how much of a commercial bank’s lending can flow to housing investors, have been used in recent years to prevent overheating in the housing market which could destabilise the banking sector.
Gross said the RBA should take control of macroprudential regulations and use those, rather than interest rates, to deal with issues such as an overly hot property market.
He said financial stability should be subordinate to the RBA’s efforts to keep inflation steady and have the economy growing fast enough that the country has full employment.
“The welfare of the Australian people would be improved by removing financial stability from the RBA’s mandate for monetary policy, leaving it to focus on the dual goals of a low and stable rate of inflation and the maintenance of full employment,” he said.
This week, the Australian Greens used its submission to the RBA inquiry to call for the bank to have an objective of maintaining a stable ecology and climate to its objectives. It also backed moving banking regulation moved from APRA to the bank and union representation on the RBA board.
This year, the US central bank has become embroiled in controversy after some of its members were revealed to hold shares and government bond holdings that could be influenced by bank decisions.
Gross said to avoid such a scandal here, senior RBA staff should be barred from holding individuals shares and bonds.