Splitting the Reserve Bank of Australia (RBA) board in two opens up the bank’s experts to focus more specifically on monetary policy.
While this is expected to relieve pressure on operations as criticism over cash rate decisions continue to churn, the timing with next year’s federal election is raising more questions.
It’s now more than a week since delayed amendments to the Reserve Bank Act successfully passed through the Senate, making a new dawn for the structure of the central bank and its decision-making.
The passing came as a surprise, with the creation of a dual structure for the board having been put on the political backburner after the bill’s stipulations failed to materialise in July as first planned.
Confirmation the board will be split in two from February come at a crucial point for the bank, which has faced mounting criticism in recent months for its hard line on interest rates.
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The Reserve Bank Act passed through the Senate late on 28 November and more than five months after expected. Picture: Getty
The cash rate in Australia is currently at a 13-year high of 4.35% and out of step with comparable nations. The board is currently in its final meeting for 2024, though with the cash rate having remained unchanged for 13 months and core inflation still high, it’s unlikely mortgage holders can expect a reprieve tomorrow.
Under its new structure, the RBA will function with two boards as it moves into 2025 – one board focused on monetary policy, and therefore on interest rates, and a board managing governance.
It’s a year already tipped for cuts, with the big bank economists expecting up to three rate cuts in the next 12 months.
Speaking at a Committee for Economic Development of Australia event on the same day of the Act’s succession, governor Michele Bullock continued to toe an ambiguous line on whether the dual structure would fix concerns brought to the fore in last year’s independent review of the bank.
“The concept is that the monetary policy board can now concentrate just on monetary policy,” she said. “Having said that, we’ve already made a lot of changes as I set out to the way we operate the board and we are already leaning into some of these changes.”
Reserve Bank of Australia governor Michele Bullock said the current board has already begun making headway on changes recommended in the review. Picture: Martin Ollman
Why a separate board?
The independent review into the RBA last year determined that more transparency was needed around setting the cash rate and managing and changing it accordingly.
Better scrutiny is something Ms Bullock suggests the bank will greatly benefit from.
“There’s a lot we do which is not to do with monetary policy at the moment and I am accountable for all of that,” she said. “I am the accountable authority, not the board. With the new framework, the governance board will be accountable for the operations of the bank, which is a substantial amount.”
A change in the amount of singular authority held by the governor could go a long way in restoring faith around the bank’s candour.
The testing COVID and post-COVID environments have been marred with political sparring as well as concerns over how the treasury and the RBA interact, raising public concerns over the motivations for delaying a rate cut.
The RBA faced criticism in the review about its board members and their inability to effectively challenge the governor on decisions, after it was revealed in the reviews that not one recommendation of an executive had been voted against in over a decade.
While a lack of rigor in cash rate decision-making was disputed strongly by then-governor Philip Lowe, the board has remained immobile on rates in recent months. This is despite some easing of external inflationary pressures and has not escaped criticism.
Next year however, the new, specialist, nine-member monetary policy board will be dedicated to setting the target for the cash rate.
This board will be made up of a governor, deputy governor, treasury secretary and six external members.
Politics at play
The existing RBA board has spent much of 2024 as a political football. The incumbent Labor Party wants to see more technical macroeconomic expertise on the back of the review findings, while the opposition has raised its concerns about a politically motivated appointment.
While board members technically serve apolitically, certain members are indeed appointed by the government.
Speaking to Mortgage Choice last month, Challenger chief economist and former RBA executive Jonathan Kearns said the selection of board members “should not depend on the government of the day”.
Ahead of next year’s federal election, the embattled Labor Party now has its own opportunity to divorce itself from direct association with the painful and restrictive monetary policy of 2024.
Treasurer Jim Chalmers struck a deal with the Greens and the Senate crossbench to push through the reforms, leaving time for Mr Chalmers to appoint several new figures ahead of an election.
Whether these new figures will bow to calls for rate relief remains to be seen.
Treasurer Jim Chalmers has a chance to overhaul Labor’s fortunes with his appointments to the new RBA board. Picture: Getty
Mortgage repayments as a percentage of household disposable income are now 10.2%, a 15-year high the Australian Council of Trade Unions said showed the need for “urgent” action.
“The Reserve Bank’s approach on interest rates is making working people’s mortgages unaffordable and its weighing down our economy,” secretary Sally McManus said.
Latest data from PropTrack for November shows national home prices reached a new peak in November following 23 consecutive months of growth.
Ms McManus said: “The banks needs to follow the rest of the world and decisively cut rates.”
As of last Friday, the ASX 30-Day Interbank Cash Rate Futures tracker indicates a 9% expectation of a rate cut tomorrow.
