Government launches ‘wide-ranging’ RBA review

Treasurer Jim Chalmers has officially announced a wide-ranging review of the Reserve Bank (RBA) that will scrutinise the central bank’s objectives, policies, governance and culture.

According to terms of reference released on Wednesday, the review aims to ensure that current monetary policy arrangements and the operations of the RBA continue to support strong macroeconomic outcomes for Australia.

“Australia is facing a complex and rapidly changing economic environment, as well as a range of long‑term economic challenges,” said Dr Chalmers.

“This is an important opportunity to ensure that our monetary policy framework is the best it can be, to make the right calls in the interests of the Australian people and their economy.”

The review will be led by a panel of three independent experts including former senior deputy governor to the Bank of Canada Carolyn Wilkins, Australian National University economics professor Renée Fry‑McKibbin and eminent Australian economist Dr Gordon de Brouwer.

The objectives of the RBA, including the appropriateness of its inflation-targeting framework, will be examined as part of the review, which will include consultation with domestic and global experts, former members of the RBA board and members of the public.

The review’s terms of reference state that the interaction of monetary policy with fiscal policy and macroprudential policy, including “during crises and when monetary policy space is limited”, will also be assessed.

“The Reserve Bank is a crucial economic institution which has served Australia well for more than six decades. This is all about ensuring we have the world’s best and most effective central bank into the future,” Dr Chalmers said.

The performance of the RBA in meeting its objectives, including its choice of policy tools, implementation and communication, as well as how trade‑offs between different objectives have been managed, will be put under the microscope.

Additionally, the review will examine the governance and accountability arrangements of the central bank along with its culture, management and recruitment processes.

Submissions will be sought “to ensure a wide range of opinions are considered” with a final report and recommendations due to be handed to the government by March next year.

The review announcement was welcomed by RBA governor Philip Lowe during a speech at the Australian Strategic Business Forum on Wednesday.

“The terms of reference are appropriate and the Government has appointed a first-class panel,” he said.

“It is an opportunity to take stock of our monetary policy arrangements and make sure that they are fit for purpose for the challenges ahead. We look forward to participating in this process and listening to and learning from others.”

RBA flags more rate hikes

In his speech, Dr Lowe indicated that the RBA may need to lift the cash rate to 2.5 per cent or higher to bring inflation back within the central bank’s target band of 2 to 3 per cent.

“If we take the 2.5 per cent midpoint of the inflation target as a reasonable estimate of medium-term inflation expectations, this suggests that the neutral nominal rate is at least 2.5 per cent,” he said.

However, he added that the neutral rate was just one reference point used by the RBA board.

“It is not the basis of a mechanical rule and we are not on a pre-set path to achieve any specific level of the cash rate,” said Dr Lowe.

“Rather, the board will continue to be guided by the incoming evidence and by its assessment of the outlook for inflation and the labour market. It is determined to do what is necessary to return inflation to 2 to 3 per cent.”

The RBA governor suggested that “a more sustainable balance” between demand and supply was required to return inflation to the target range, and that higher interest rates would help to achieve this by moderating growth in aggregate demand.

“With the COVID emergency now over, so too is the time for emergency settings of monetary policy,” he said.

“The RBA was patient in withdrawing the insurance that was put in place during the pandemic. We wanted to ensure a robust recovery and we were very aware that our main policy instrument — the cash rate — was at the effective lower bound.

“That robust recovery has taken place and the time for ultra-low interest rates is now behind us, given that inflation is high and the labour market is very tight.”

Commenting on the speech, Commonwealth Bank senior economist Belinda Allen drew attention to Dr Lowe’s use of the word ‘steady’ when it came to future rate increases.

“Unlike other central banks where a recession is required to bring inflation down, the RBA remains committed to lifting interest rates but still allowing for economic growth (albeit a moderation) and low unemployment,” she said.

“The one area that could alter this and see a steeper lift in the cash rate is the evolution of inflation expectations. To date, longer term inflation expectations remain well anchored, with shorter term ones lifting.”

While Dr Lowe still sees the neutral cash rate being at least 2.5 per cent, Ms Allen noted that CBA believes neutral is actually closer to 1.5 per cent.

The bank currently expects two 50-basis point (bp) rate hikes will take place in August and September followed by a 25-bp lift in November that will bring the cash rate to 2.60 per cent.

Meanwhile, ANZ recently predicted a different path for interest rates for the remainder of 2022 with four consecutive 50-bp hikes expected in the coming months.

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.