As Published in the Australian Financial Review Thursday, 21 March 2024

A credible, capable, stable and independent central bank has proven to be one of the most powerful institutions underpinning a strong, low inflation economy.

While our Reserve Bank hasn’t always got it right, we can’t afford any actual or perceived shift away from stability and independence in these uncertain economic times.

In responding to the Reserve Bank review, the Coalition made it clear that continuity of board appointments would be a critical condition of bipartisan support. This was an express red line issue when consulted on the draft legislation in September and October last year.

The Treasurer’s refusal to negotiate with the Coalition to secure continuity of governance for interest rate setting is a sign he wants revolution not evolution.

Having promised to put the Reserve Bank above partisanship, the Treasurer’s rejection of the Coalition’s proposed transitional amendments to the Reserve Bank Act Reform Bill is disappointing.

The legislation, as drafted, doesn’t just give operational flexibility to the Treasurer of the day. It explicitly abolishes the Board as it currently exists.

This puts all positions up for appointment, not just those who seek it. Far from a voluntary redundancy, the only people assured to continue their position are the Governor, the Deputy Governor, and the Secretary of the Department of Treasury. This is a view that has been confirmed by the Reserve Bank Governor in her evidence to the Senate Economics Committee inquiry.

The Treasurer claims he wants independence, yet this legislation means four of the six external members of the RBA Board will be reappointed at his pleasure years before their terms would otherwise expire.

The other two external members were appointed by the Treasurer without following the RBA Review’s process in April last year.

The argument the Governance Board also needs continuity does not hold muster: the entire rationale for the Governance Board’s creation is because the Review found the current Board rarely considers Governance issues. Further, the nature of the legislation gives the Treasurer the flexibility to appoint members to both boards concurrently.

The RBA Review found that the existing Board “meetings are almost entirely focused on monetary policy, with corporate governance matters appearing only occasionally”. The review also noted that “past and current Reserve Bank Board members found that most members viewed the Board as a monetary policy making body, with corporate governance largely falling outside their remit.”

This is a spill, not a transition. It comes at precisely the wrong time in the current macroeconomic environment.

Australia still faces stubbornly high inflation, more than 1.6% above the midpoint of the target band – which under Treasurer Chalmers’ new statement of Conduct of Monetary Policy the bank is required to target.

Non-tradable inflation – that is domestic inflation – remains even higher, while non-discretionary and services inflation remain well above band.

With a highly uncertain geopolitical outlook including continued pressure in the Red Sea, sustained conflict in the Middle East and the Ukraine, and a structural deficit that Labor’s two budgets have only made worse, this leaves Australia’s inflation trajectory highly exposed to further shocks.

At the same time, Australia is seeing considerable pressure on unit labour costs as labour productivity has collapsed in a manner not seen in peer countries.

As the Reserve Bank itself has highlighted in its submission to the Senate Economics Legislation Inquiry, this economic environment increases the importance that “any near-term reconsideration of the composition of the Board recognises the value of continuity of membership and recent monetary policy experience” over the next two years.

It also noted that “this is particularly important at the current juncture, where the Board is navigating a challenging policy environment and significant changes in processes for determining monetary policy.”

These are the Treasurer’s reforms, and the options are his.

The Treasurer can negotiate with the Greens, whose opposition to section 11’s abolition has less to do with the fact it is a friendless proposition and more to do with the fact they would happily use the provision to sack the Governor.

Section 11 of the bill gives the Treasurer the power to override Reserve Bank decisions.

Alternatively, he can negotiate with the Coalition – which merely wants to preserve the independence and continuity of interest rate setting at a critical juncture in the monetary policy cycle.

The Coalition has proposed a sensible and modest amendment to convert the RBA Board to the Monetary Policy Board in the legislation, carrying over existing members’ appointments.

That would ensure continuity on the current board, while allowing the evolution of the specialist Monetary Policy and Governance Board over time.

The government has a choice: work with us on preserving the stability and independence of our Reserve Bank, or work with the Greens to undermine it.

This is not a time to ‘remake capitalism’.