RBA makes significant changes to policy processes

The RBA has announced it will reduce the frequency of its meetings to eight times a year from 2024 and hold longer meetings in response to the independent review into the Reserve Bank.

Governor Philip Lowe said less frequent and longer meetings will provide more time for the board to examine issues in detail and have deeper discussions on monetary policy strategy, alternative policy options and risks, as well as on communication.

“Likewise, the staff will have more time for analysis, with less time spent preparing summaries of recent developments. The board will also be able to hear directly from more staff and have greater opportunity to request work on particular topics,” said Mr Lowe.

The board will also now oversee the Bank’s research agenda as it relates to monetary policy and aspects of financial stability.

The board will also work with the Treasury to undertake five-yearly open and transparent reviews of the monetary policy framework.

The RBA Board has decided that other recommendations made by the independent review would be best considered after the legislative process has been completed and the new monetary policy board is established.

This includes recommendations such as the publication of an unattributed vote count and board members making regular public appearances to discuss their thinking and decisions on monetary policy.

Other recommendations that will later be considered also include the establishment of an expert advisory group to engage with the board and board papers being published with a five-year lag.

“These issues are interrelated. Practices differ across central banks, and they are often tailored to the country’s particular circumstances and institutional structure,” said Mr Lowe.

“The current board has therefore judged that these four issues are best considered by the new Monetary Policy Board as a package.”

Mr Lowe said the current Reserve Bank Board structure and that recommended by the review is unusual by international standards.

“In almost every other central bank, most of the decision-makers are insiders – that is, they spend the bulk of their time inside the central bank,” said Mr Lowe.

“In our case, only two of nine Board members are insiders. The other seven spend the bulk of their time outside the RBA and this will remain the case. This is a significant difference between the RBA and other central banks.”

The Australian model has the advantage of ensuring there is diversity of thought and it helps bring a wider perspective to monetary policy decisions, said Mr Lowe.

“However, it does have implications for the way those decisions are communicated and the appropriate accountability mechanisms,” he said.

“In my view, it is right to allow the new Board to consider these issues and make its own decisions after due deliberations.”

The board has also reviewed its Code of Conduct and agreed to strengthen the standards by making it clear that members, and entities they control, are prohibited from transacting in interest rate and foreign exchange derivatives and from active trading in financial instruments.

“These same restrictions already apply to the bank’s staff. The board also agreed that the Code of Conduct should be reviewed again by the Monetary Policy Board after it is established,” said Mr Lowe.

Cultural change at the RBA

Mr Lowe said the RBA will also be embarking on a “significant program of cultural change” following the findings by the review panel.

The RBA will update the leadership goals that apply to all managers to make it clearer that they are expected to create an inclusive environment where staff can share ideas in an open and constructive way.

“In addition, a comprehensive 360-degree feedback process for all senior leaders will be introduced in the year ahead and we are exploring deeper and more consistent leadership training,” said Mr Lowe.

“We have also begun advertising more management vacancies externally and we will increase transparency around internal opportunities for rotations. As part of this journey of cultural change, we are also reviewing the internal processes and structure that support the Board’s decision-making.”

The RBA will also adopt the Review’s recommendation to appoint a chief operating officer to ensure operations are efficient.

“This recommendation also makes sense. The bank has become a more complex organisation over time and standards of governance continue to rise. We are currently working through the appropriate span of control and reporting lines of the chief operating officer and will begin the search process for this role later this year,” said Mr Lowe.

It has also agreed to the review’s recommendation to establish a separate communications department.

Inflation risks ‘shifting to the upside’

The RBA’s decision to keep the cash rate target unchanged at 4.1 per cent will give the board more time to assess the state of the economy and the economic outlook, said Mr Lowe.

“The board is very conscious that monetary policy operates with a lag and that the full effects of the tightening to date have not yet been felt,” he said.

“It takes time for households and businesses to adjust their spending and investment plans, and there are still significant resets of low fixed-rate loans to come. Given the lags, economic growth is expected to be subdued over the next couple of years and it will take time for inflation to return to target.”

The RBA’s current set of forecasts from early May suggest inflation will return to the top of the target band in mid-2025.

“Data received since then had suggested that the inflation risks had shifted somewhat to the upside. The board responded to this shift in risk with a further lift in interest rates.”

The board is continuing to assess the central forecast and the risks and will conduct a full review at its next meeting in early August.

“It is a complex picture and there are significant uncertainties regarding the outlook. The Board decided that, having already increased rates substantially, it was appropriate to hold interest rates steady this month and re-examine the situation next month,” he said.