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RBA to be scrutinised on monetary policy

·Personal Finance Editor
·4-min read
RBA Governor Philip Lowe.
The Reserve Bank of Australia (RBA) will face an independent review. (Source: Getty)

The Reserve Bank of Australia (RBA) will face an independent probe for the first time since the 1990s.

Federal Treasurer Jim Chalmers said the review was about “renewing, revitalising and building confidence in the Reserve Bank”.

Chalmers announced the terms of reference for the undertaking had been finalised and a three-member independent panel had been appointed.

It will comprise external member of the Bank of England's financial policy committee Professor Carolyn Wilkins, leading macroeconomist Professor Renee Fry-McKibbin and secretary for public sector reform Dr Gordon de Brouwer.

The panel will examine monetary policy arrangements, including whether the bank's current 2-3 per cent inflation-targeting framework is appropriate.

Chalmers said the review would be the first since the current monetary policy was instituted in the 1990s, and would be approached with an open mind.

"I'm not aware yet of a better, more appropriate regime for Australia but that's the whole point of the review," Chalmers told the ABC.

"If they can learn from the Canadian experience of inflation targeting, if they can learn from the experience of other central banks around the world, I think that's a good thing."

Chalmers also flagged possible changes on the RBA's board.

"One of the things that I do want the review to look at is the breadth and depth of the expertise and experience that's on the board," he said.

"There will be appointments that we will be asked to make to the Reserve Bank board in this term of the Parliament and I'd like to do that based on the best advice on the best mix of people.

"There are good people on the board right now but if there are ways we can make the experience and expertise on the board deeper and broader, then we should look for ways to do that."

SYDNEY, AUSTRALIA - MAY 5, 2018: Reserve Bank of Australia building name on black stone wall in the center of Sydney NSW Australia.
The review will focus on revitalising and building confidence in the RBA. (Source: Getty)

It is expected the panel will produce its final report and recommendations to the Government by March 2023.

The review will also consult with economic experts from Australia and overseas, as well as former RBA board members. The public will also be able to make submissions.

Chalmers said the task was critical given the range of long-term challenges to the national economy on the horizon.

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

Why now?

The review comes at a time when the RBA has been criticised for not doing more, sooner, to curb inflation in Australia.

Many economists have taken aim at the bank for not anticipating higher inflation was on the horizon and not increasing the cash rate from record lows before it took hold.

On the flip side, RBA governor Philip Lowe has said many times that the bank has only ever acted on the information it had available at the time, meaning it has not acted in anticipation of events.

Why is inflation so high?

The main area of concern here is inflation - the rising cost of living.

Speaking to the Australian Strategic Business Forum today, Lowe reaffirmed that the current driver of inflation in Australia was primarily global factors brought on by COVID-19 lockdowns and the war in Ukraine.

“After many years in which inflation was something that most people didn't think too much about, it is now a topic of everyday conversation,” Lowe said.

“This is understandable as higher prices are putting pressure on people's budgets.”

Lowe said the RBA was focused on bringing inflation, currently sitting at 5.1 per cent, back into the 2-3 per cent target range, while also keeping the economy “on an even keel”.

“We are seeking to do this in a way in which the economy continues to grow and unemployment remains low,” Lowe said.

“It is certainly possible to do this, but the path ahead is a narrow one and it is clouded in uncertainty.

“Global factors, including Russia's invasion of Ukraine, are one source of this uncertainty.”

- With AAP

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