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Analysis: RBA Review: No need to shift mandate or inflation target    

• The Terms of Reference for the RBA Review have been finalised, the three-member review panel appointed, and March 2023 set as a deadline for a final report containing recommendations to the Government. In this Weekly, we look at what to expect. A wide net has been cast, with the RBA’s objectives, policy implementation, governance processes and public communications all in scope. So too is the interaction between monetary, fiscal, and macroprudential policy settings.
• A primary focus of the review will be “the continued appropriateness of the inflation targeting framework” meaning the numerical choice of the 2-3% inflation target and inflation targeting itself are in scope. We would be very surprised to see a change to the level of the 2-3% target or to the inclusion of inflation targeting as an objective, but if either were to occur it would have first-order implications for markets.
• Australia’s inflation target is slightly higher than comparable advanced economies, but economists tend to emphasise the importance of continuity in the target, and where they do favour change, overwhelming prefer a higher target, each suggesting a shift is unlikely. Despite some prominent voices urging a shift to nominal GDP targeting, we see a shift away from flexible inflation targeting as unlikely.
• That leaves room for clarifying or narrowing the RBA’s objectives and inflation targeting framework, which is broadly defined and interpreted with wide discretion. Examples could be an explicit dual mandate with full employment, clarifying where financial stability considerations sit, a more precise inflation targeting benchmark, or a more forward looking flexible (not average) target like the Bank of Canada’s.
• The interaction between monetary, fiscal, and macroprudential policy is also within scope, leaving room for important findings on the appropriate role for the different arms of macro-stabilisation policy. An increased role for fiscal policy in an environment in which central banks have limited conventional policy space is clear. The recent experience asks important questions about the relative contributions as policy accommodation is being withdrawn, and novel fiscal policy approaches during the pandemic including temporarily higher unemployment benefits or targeted voucher-based demand stimulus represent responsive fiscal stimulus that can be weighed against the effectiveness of unconventional monetary policy tools.
• The Review will also assess the RBA’s performance, governance, and culture. Some change to the structure of monetary policy decision making and communication seems likely, with the composition of the Board regularly criticised for being ill-prepared to challenge the views of RBA staff and raise alternatives. Examples of ‘poor performance’ are likely to be assessed with a lens to what changes could prevent similar errors from happening again or identifying and correcting them sooner. The experience with overly strong and slow-to-adjust forward guidance based on poor forecasts alongside the pandemic recovery, including the exit from unconventional policy settings, is one example where the Bank handled things poorly.

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