The Australian Treasurer has released the Reserve Bank of Australia Review Report.

UPDATE 12 July 2023: Reserve Bank’s response.

The Report identifies 4 ways the governance, monetary policy framework, culture and systems of the RBA should be reinforced:
1. The monetary policy framework is fundamentally sound but should be more clearly defined and regularly assessed for updates.
2. Monetary policy decision making should be strengthened, drawing on more expertise and with processes that promote deeper contestability of ideas.
3. The RBA should become more open and dynamic, through new internal structures and approaches.
4. The RBA’s corporate governance should be strengthened, with contemporary governance structures that better manage risk and drive change.

Specific recommendations include:

• The RBA should have dual monetary policy objectives of price stability and full employment, with equal consideration given to each. The economic prosperity and welfare of Australians now and in the future should be an overall purpose for the institution.
• The RBA should retain a flexible inflation target of 2 to 3 per cent and aim at the midpoint to maximise the chance that the target is met and best anchor inflation expectations.
• The RBA should systematically set out its assessment of its full employment objective, as reflected in a range of relevant indicators of labour market conditions.
• The RBA should clearly explain how it is balancing its two monetary policy objectives, including how long inflation is expected to be materially away from the midpoint of the target and why, and how long labour market conditions are expected to deviate from full employment and why.
• There should be increased joint work between Treasury and the RBA on the relative roles of fiscal and monetary policy.
• There should be more formalised cooperation arrangements for financial stability policy including by the RBA providing formal advice to APRA for its use of macroprudential tools.
• The Government should establish an RBA Governance Board with an external chair to support and oversee management, drawing on best practice elsewhere. The Governance Board’s role should include oversight of the RBA’s organisational strategy, finances, strategic staff planning and risk management (including cyber risks). It should have no role in monetary, financial stability or payments policy or the day to day running of the RBA.
• The Government should form a Monetary Policy Board with greater economic expertise and participation in decision making while maintaining diverse perspectives and knowledge.

The Treasurer said the Government agrees in‑principle with all the Review’s recommendations and will now work with the RBA, the parliament and other stakeholders to implement them.

Subject to consultations with the Opposition, the Government intends to introduce legislation to:

• reinforce the independence of the RBA in the operation of monetary policy;
• strengthen the RBA’s mandate and clarify that Australia’s monetary policy framework will have dual objectives of price stability and full employment; and
• establish a separate Monetary Policy Board and Governance Board to ensure decision-making and corporate governance arrangements are as effective as they can be.

The Treasurer said he will work with the RBA Board to agree on a new Statement on the Conduct of Monetary Policy to be finalised before the end of 2023.

The Statement will reaffirm the Government’s commitment to the independence of the Reserve Bank and support for the inflation targeting framework. It will also set out our shared understanding for strengthening decision-making, accountability and transparency in monetary policy decisions, in line with the Review’s recommendations.

The Reserve Bank says the Bank will work constructively to ensure that the establishment of separate boards for monetary policy and governance of the Bank and the other recommended changes to the Reserve Bank Act strengthen the Bank and the way it operates. It will also work constructively with the Treasurer on an updated Statement on the Conduct of Monetary Policy.

The Australian Prudential and Regulation Authority (APRA) has welcomed the recommendations of the report that relate to APRA including the recommendation directed towards reinforcing cooperation arrangements for promoting financial stability. This includes refreshing memorandums of understanding to provide greater public clarity regarding Council of Financial Regulator (CFR) agency roles and introducing greater formality to macroprudential policy cooperation arrangements.

APRA confirms it will work closely with the RBA and other CFR agencies to implement relevant recommendations, in line with the implementation roadmap to be published by the RBA.

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Author: David Jacobson
Principal, Bright Corporate Law
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The information contained in this article is not legal advice. It is not to be relied upon as a full statement of the law. You should seek professional advice for your specific needs and circumstances before acting or relying on any of the content.