RBA change is coming, like it or not
More people, more input, more cooks in the kitchen. That’s ultimately the price the Reserve Bank of Australia will pay for a couple of years of bad or miscalculated calls, made in response to the pandemic.
Ironically, the review was conceived in the pre-COVID days when the RBA was criticised because inflation was running below its 2 to 3 per cent target range. All the attention is on what has happened since.
When money was flooding into the financial system and the economy, it is now clear the RBA board was too slow to apply the handbrake. The result is the highest level of inflation since the 1990s and an unprecedented 10 straight rate rises that were never going to be popular with ordinary Australians or politicians. No one seems to care that the unemployment rate is around its lowest level in nearly 50 years.
Right or wrong RBA governor Philip Lowe wears the blame. He will be all over the newspapers and nightly television news bulletins, even though markets (equities, bonds, currency) barely blinked. Mr Market saw the review coming, and now says the changes are some way off.
From the market’s perspective, next month’s budget is more material. Treasurer Jim Chalmers needs to set up the books for the next few years, which means finding more money. The economy is finely poised: it would be tempting to throw money around to ease cost of living pressures, although money’s tight and the inflation doesn’t need stoking.
In the meantime, old-head RBA watchers said it was a significant day. The fact that the central bank, which has such a great impact on Australians’ daily life, was subject to such scrutiny made it a historic day.
Lowe and the RBA will be hauled over the coals for what happened a few years ago, even though it was just as much the government stoking the fire that continues to burn today. The critics argue he should be accountable for the combination of low rates, forward guidance, yield curve control, quantitative easing and the term funding facility, which combined to whipsaw the economy and may yet cause a recession.
Of course, Lowe’s monetary policy is just one tool.
Once the commotion passes, we should all still be worried about the rising cost of rent and energy and how both can be addressed. The review doesn’t change that.
The review prompted plenty of thinking about the RBA, its corporate governance, board composition and decision-making. It recognised that in more normal times, the RBA had done well to keep inflation around the midpoint of its 2 to 3 per cent range for the past 30 years.
However, it is the past few years, a wartime for central bankers when no one escaped with a goldilocks path out the other side, that will now shape the direction of Australia’s monetary policy system.
What’s the answer to it all? Get more people involved in the decision-making. A specialist monetary policy board, fewer board meetings and more outsiders sitting around the table.
Reading between the lines, there seemed to be concern about how insular the RBA either is, or has become. Lowe is a perfect example; he’s got a great temperament for the governor’s job, is clearly smart and well regarded by colleagues and peers globally, but he is an RBA lifer and ingrained in current-day practice.
The creation of a new nine-person Monetary Policy Board, widely tipped by pundits, is about getting more rigorous thinking into rates decisions.
The nine people would include the RBA governor, deputy governor, Treasury secretary and six outsiders. The review recommends that ‘‘external members should be able to make a significant contribution to monetary policy setting through expertise in areas such as open economy macroeconomics, the financial system, labour markets, or the supply side of the economy, and in the context of decision-making under uncertainty’’.
So, this specific rate-setting board should mean more challenge and debate to the house view, which appears to have become more entrenched. At the same time the review calls for RBA’s operatives to spend more time with board members, making it a bit of an each-way bet but a good use of what is a big and expensive research team. (The need to spare a day a week or so in the RBA’s offices surely tilts the external board positions towards academics.)
The undertones were that the board wasn’t functioning properly, either because it didn’t have the right people or the right information. Lowe defended his board at a press conference yesterday, saying discussion around the boardroom table was robust and not dominated by himself.
It’s all well and good to have more people in the room on rates decision day, but it does not mean the board will function more efficiently or come to better decisions.
But big boards do not necessarily mean better outcomes. Corporate Australia is littered with poor boards and ‘‘jobs for the directors club’’ type attitudes that ruin what can be otherwise good businesses.
Often the bigger the board, the more constipated the decision-making process. The other scourge is chairmen roping in old mates and colleagues from other boards.
Ultimately, whether a separate and bigger Monetary Policy Board works will depend on who is on it. It was a logical and welcomed decision to create the separate board, and clear rate-setters of the governance-type matters that tend to dominate board meetings.
The review recommended a transparent appointment process, starting with advertised expressions of interest. External members would be appointed for five years, and up to another year depending on the circumstances.
There would also be fewer board meetings; eight not 11. And the governor would have to front the press following each meeting to explain the board’s decision, with more emphasis on the expected path of inflation and the labour market. That shouldn’t prove too onerous. External board members would also be required to make one public address each year.
The idea of more communication is conceptually good, although post-meeting press conferences can be a double-edged sword. We’ve seen Federal Reserve chairman Jay Powell mix his messages in a live setting, which can leave the market with more questions than answers.
Fewer meetings mean more time between rates decisions and arguably more punting and reading the crystal ball for fixed income investors. There could be more focus on monthly/quarterly economic data, to fill the information void between meetings.
Market economists liked that there could be more briefings, as it should (in theory) help them with their forecasts. They also probably like that there would be an unattributed published vote after each policy decision.
Other parts of the review said RBA should work more closely with the government/ Treasury, although it remains to be seen how. The review said fiscal and monetary policy should be set separately, however the RBA and Treasury needed to ‘‘have a good understanding of the intentions of the other and informs better policy choices’’. The two institutions are already close, but the review said their co-operation should include increased information sharing on risks, scenarios and policy constraints, and some joint scenario analysis.
Lowe was gracious at his press conference, although it was clear he did not love all the recommendations. For example, he bristled at any notion rates decisions were his alone and thinks it’s important to be careful with the number of public messages out of the RBA to ensure consistency and stability.
Lowe said he would leave his reappointment to the RBA top job in the Treasurer’s hands. He said he would be happy to go around for another term if asked. If not, he said he would find another way to contribute to society.
The fact that the RBA was subject to a 294-page review and there were 51 recommendations suggests change is on the cards.
Next week’s CPI reading could be material to the situation. Economists are tipping a number just shy of 7 per cent.
For all the focus on Lowe, in the near term the real attention should be on Chalmers and the budget. That’s the real showstopper for the economy.
a.macdonald@afr.com
