Sam Hawley: Hi, I’m Sam Hawley, coming to you from Gadigal Land. This is ABC News Daily. The decisions it makes have a huge impact on our livelihoods. But is the Reserve Bank of Australia fully accountable for the pain it can cause? Not according to a review that’s called into question how it’s been operating under the current governor, Philip Lowe. Today the host of Insiders, David Speers, on why the RBA is about to undergo massive change, as the era of monthly interest rate rulings comes to an end.
Speersy, in the past year, the Reserve Bank of Australia has been on our minds probably more than we’d hoped for. It’s been very financially tough for many people, and we’re not that happy, are we, with Philip Lowe?
David Speers: No, I think that’s fair to say. And I think a lot of the criticism hasn’t just been around the rate rises themselves, but been around the advice, or the guidance, that the Reserve Bank governor gave ahead of these ten interest rate rises. And that guidance, of course, famously was that there wouldn’t be or there wasn’t envisaged to be any increase in interest rates until 2024.
Philip Lowe, Reserve Bank Governor: I’m sorry that people listened to what we’d said and acted on that and now find themselves in a position they don’t want, don’t want to be in. People did not hear the caveats in what we said and my language was always caveated, but…
David Speers: Now, clearly, there may have been some caveats around that, but that wasn’t very well communicated.
Sam Hawley: Hm, and Philip Lowe, he’s appeared, hasn’t he, before a number of parliamentary inquiries since then… And he’s made the point that it’s not all his fault – he sits on a board. He doesn’t act on his own…
Philip Lowe, Reserve Bank Governor: I don’t take this personally because I’m just one person on a board of nine and a staff of 1500.
David Speers: Yeah, and he did make this point at the start of the year, appearing before those parliamentary committees, that it’s a board of nine, they make collective decisions, the nine of them.
Philip Lowe, Reserve Bank Governor: We don’t always get it right, but we always try and do the right thing by the Australian people and I take great comfort from that.
David Speers: What this review, however, has found, and this is really one of the key themes of the whole review, is that in reality there’s not much push back, not much testing of the governor’s view around that board table, amongst those nine sitting around the table. It’s usually the executive leadership of the Reserve Bank, and that’s led by the governor, in this case, Philip Lowe, who will come in with a decision, and what they decide typically goes. And so what’s being recommended here is to try and inject a lot more monetary policy expertise around that board table in a separate monetary policy board, so that there is more debate, more contesting of the views of the executive of the Reserve Bank from experts in the field, to challenge and test the sort of decisions that are being proposed before a final decision is made.
Jim Chalmers, Treasurer: Okay, everyone good? Today, the Albanese Government is releasing this independent review of the Reserve Bank of Australia…
Sam Hawley: Okay, so hang on, just so I’ve got this straight, Speersy, the recommendation of this review is that we have another board, so we’ve got two boards. Is that right?
Jim Chalmers, Treasurer: And we also will seek to establish separate monetary policy and governance boards to strengthen expertise, decision making and bring us more into line with world’s best practice…
David Speers: It’s something that other comparable developed economies do. Canada, England, for example, you’d have two boards one a specialist monetary policy board that would make the big calls on the cash rate on interest rates. How many would sit on that is a little unclear, but they would be monetary policy experts, labour market experts, those who have a proven record and expertise in that field of setting interest rates and the impact it’s going to have in a macroeconomic sense. The other board would be a governance board, and that would be more akin to a typical corporate board with governance experts sitting around it, because don’t forget, the Reserve Bank does a lot of other things beyond setting interest rates – from printing banknotes and passports, managing foreign reserves, it’s the banker to the government. It operates the national payments infrastructure.
Philip Lowe, Reserve Bank Governor: So there’s a lot more going on in this building than just monetary policy. Under the Reserve Bank Act, I, as the governor, am charged with managing the bank and I’m also the accountable authority under the Public Governance Performance and Accountability Act.
David Speers: And all of these things, as well as its internal staff and management a governance board would oversee. So that’s that’s the recommendation that’s now been adopted and will be in place, we’re told, by mid next year. I think it’s.
Philip Lowe, Reserve Bank Governor: True to say that from a number of perspectives, the current oversight arrangements of me as the governor for managing the bank falls short of contemporary standards. So the proposed changes would help address this and they would help me as governor manage the bank and the many complex and important functions we undertake. So I support that that change.
Sam Hawley: So if we had two boards, does that mean we have two governors? So two Philip Lowes?
David Speers: Well, the recommendation is that you would have different people chairing these two boards. The governor of the Reserve Bank would chair the monetary policy board – the board making the the decisions on interest rates. But you would have someone else chairing that governance board. Now who that might be, we’re a long way from seeing that, but yes, it would be two separate people and that does make some sense to have complete separation between these two boards doing very different things at the Reserve Bank.
Sam Hawley: And it seems like one of the recommendations is that these boards wouldn’t meet quite so often, so they wouldn’t be meeting monthly like we see with the current RBA board.
David Speers: Well, again, this is something that happens in comparable countries. They don’t meet every month in Australia. The Reserve Bank board meets every month except for the January break, so they meet 11 months of the year. The suggestion here is to move to eight meetings a year rather than 11. So you’d be back to, what’s that, around every six weeks? Look, you know, in principle, the government’s agreed to this. Philip Lowe has said that they’ll consider this and provide a response, but, look, I wouldn’t be surprised if there’s a bit more debate around this. We have a lot of people on variable interest rates in Australia compared to, say, the United States. And so it is a tool, moving rates each month if you need to, that can be deployed quickly and can have a big response because of the fact so many are on variable rates. So, look, whether we move to a meeting every six weeks or not, I suspect there’ll be some change, but, you know, we’re yet to settle on exactly what that might be.
Sam Hawley: Mhm. And that target inflation rate, which is why the Reserve Bank moves interest rates around to meet that target inflation rate of 2 to 3%, that’s going to stay the same, right?
David Speers: That will stay the same.
Jim Chalmers, Treasurer: The updated statement will reaffirm our commitment to the independence of the Reserve Bank and our support for the inflation targeting framework.
David Speers: So yes, there’s broad bipartisan agreement that that 2 to 3% inflation target works. There has been a bit of debate over the years about whether it should be a wider target, you know, perhaps going a little higher than 3%, but no, the review has determined that that has been a very successful target and that should remain in place. The Reserve Bank governor, Philip Lowe, agrees that it should remain in place. And similarly, I mean this review does point out that over 30 years the Reserve Bank’s done a very good job. Yes, there are problems over the last few years that we’ve discussed, but it’s done a very good job. The independence of the Reserve Bank has been critical to that as well. And in fact it’s recommending strengthening that independence, removing a power that the Government has, but that isn’t really used and that’s a power to override a Reserve Bank decision. So that would go and that would strengthen the the the role of the RBA.
Sam Hawley: So cementing its independence even further. It’s a pretty big review, isn’t it? It’s significant and it’s not that flattering a critique of how the RBA functions at the moment.
David Speers: Well, you’re right, it’s a very important review. There hasn’t been one for about 40 years and these will be these recommendations once enacted, some of the biggest changes since the early 90 seconds when the Reserve Bank gained its full independence. And it is, you know, while acknowledging the bank’s done a very good job over 30 years, it is critical, as I say, both around its decision making. Once inflation was really starting to take off post COVID, its misjudgement on that front, its communication that that misguidance it gave about keeping rates.
Reporter at press conference: Particularly the guidance around those rate rises not coming into effect to 2024. That was raised as a key issue.
Philip Lowe, Reserve Bank Governor: But it has been an issue and we’ve responded to it publicly a number of times. We put out a review of our approach to forward guidance and that…
David Speers: The way it communicates after each board meeting would also change under these recommendations. Regular press conferences, speeches, far more transparency around not just the governor’s views, but the whole board’s views.
Philip Low, Reserve Bank Governor: The way the board operates is that they’ve appointed me as their spokesperson for monetary policy, and the review panel is recommending that the board members also speak on the economy and monetary policy, at least on some occasions, And if the board decides that that would have…
David Speers: Look Philip Lowe has welcomed all this, he’s very open to all of this. He has been very cooperative through what must have been a very uncomfortable process for him personally. I would note the review and the Treasurer are being careful not to criticise him personally too much, and there is still a question mark as to whether he will continue in the role once his current term expires in September.
Philip Lowe, Reserve Bank Governor: It’s entirely up to the Government whether whether I continue to serve in this role after September. If I was asked to continue, I would. If I’m not asked to continue, I’ll find another way to contribute to Australian society.
Sam Hawley: Okay, so no decision on that at the moment. So let’s look at what comes next then, Speersy, because obviously there will need to be some legislation and the Treasurer Jim Chalmers, has really pointed out how crucial, how critical, bipartisan support is in relation to changes to the RBA board and how it operates.
David Speers: Yes, and I think he’s right. Bipartisanship is critical on this. We’ve seen the Government over the past year having to do a lot of things without bipartisan support from the Coalition, its climate targets, its climate policy on the safeguards mechanism, its manufacturing policy, all sorts of things, not to mention the Indigenous voice – it’s proceeding with that without bipartisan support. Jim Chalmers and Angus Taylor you know, they don’t they don’t share views on a lot of things, but it seems like there is broad agreement on the direction of these sorts of recommendations. Angus Taylor’s, you know, said that they need to go through their own processes in the coalition, but he is broadly supportive of the direction being suggested here. That is going to be critical.
Sam Hawley: Yeah, exactly. Let me ask you, Speersy, though, this is the most important thing, isn’t it, for Australians? How will they be better served? What does it mean, do you think, for interest rates and how they’re set going forward?
David Speers: Well, it will hopefully mean, as the Treasurer has said, a more effective, more transparent and more independent Reserve Bank that has more expertise around these decisions on interest rates. And you would think that’s only going to be a good thing for Australians and for the Australian economy. That’s the aim here, through making all of these various changes, most notably bringing in more experts on monetary policy to make these big calls that clearly over the last few years we have seen some mistakes made.
Sam Hawley: David Speers is the host of Insiders. Catch it on ABC TV on Sunday morning at 9:00 or on iView. This episode was produced by Flint Duxfield, Veronica Apap, Sam Dunn and Chris Dengate, who also did the mix. Our supervising producer is Stephen Smiley. Over the weekend Catch This Week with Melissa Clarke, for more analysis on the shake up of the RBA. I’m Sam Hawley. ABC News Daily will be back again on Monday. Thanks for listening.