Australia to review RBA inflation target, policy tools

AUSTRALIAN Treasurer Jim Chalmers announced a wide-ranging review of the Reserve Bank (RBA) that will look at its inflation target, policy tools, governance and culture, amid criticism over its forecasts and interest-rate decisions.

A 3-person panel comprising Carolyn Wilkins, a former Bank of Canada senior deputy governor, Renee Fry-McKibbin, an economics professor at the Australian National University and former treasury official Gordon de Brouwer will conduct the independent review, Chalmers said in a statement on Wednesday (Jul 19).

"Australia is facing a complex and rapidly changing economic environment, as well as a range of long-term economic challenges," the treasurer said in the statement. "This is an important opportunity to ensure that our monetary policy framework is the best it can be, to make the right calls in the interests of the Australian people and their economy."

The RBA came in for criticism as it maintained a dovish tone at a time when many of its peers were already hiking rates, keeping borrowing costs at a record low until May, when it then increased its benchmark by more than expected. Governor Philip Lowe conceded the bank's forecasting had been "embarrassing", adding to reputational damage done by its "disorderly" exit from yield control last year.

Past inquiries at the Federal Reserve and the European Central Bank explored their approaches to inflation, resulting in more scope for them to allow prices to run beyond targets. Australia currently operates a flexible inflation target that aims to keep consumer-price gains between 2-3 per cent over time.

The RBA has previously been criticised for its insularity - since formal independence in 1996 every governor has been a staff member - and a lack of policy expertise among the 6 independent board members who are primarily drawn from business. The OECD in September urged Australia to conduct a review.

"I want this to be a forward-looking review - all about the best combination of arrangements into the future," Chalmers told reporters. "I don't want this to be all about taking potshots at the governor or the board."

The review will consider the RBA's objectives, mandate, the interaction between monetary, fiscal and macroprudential policy, its governance, culture, operations, and more, Chalmers said.

According to the terms of reference, the review will assess Australia's monetary policy arrangements and other matters including:

SEE ALSO

Australian dollar sees some relief on talk of bigger RBA rate hikes

Australia government to update on budget forecasts, RBA inquiry

• Its performance in meeting its objectives, including its choice of policy tools, policy implementation, policy communication, and how trade-offs between different objectives have been managed.
• Its governance (including Board structure, experiences and expertise, composition and the appointments process) and accountability arrangements.
• Its culture, management and recruitment processes.

A final report, with a set of clear recommendations to the government, will be provided no later than March 2023. BLOOMBERG