AMW: RBA Review to begin ‘relatively soon.’ What to expect

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Analysis:  RBA Review to begin ‘relatively soon.’ What to expect   

• A review into the RBA is expected to occur “relatively soon” according to the newly elected Labor Government. The terms of reference are yet to be finalised, but it is expected to be a broad-ranging review according to Treasurer Chalmers. In this Weekly we update our prior analysis on what to expect from an RBA Review.
• What we know so far – not much:
  • Treasurer Chalmers recently stated he is “keen to get the ball rolling relatively soon” on an RBA Review. Such a review was widely flagged in 2021 by both sides of politics and we wrote extensively on it back in September 2021 (see AMW: RBA Review? what it may recommend given Fed, ECB and RBNZ reviews).
  • The exact form of the review has not been set, but media point to three options: (1) a joint RBA-Treasury review, which is said to be the model preferred by Dr Lowe; (2) an independent outsider leading a review; or (3) a hybrid model. With some reports suggesting an independent review is more likely  (see AFR, SMH ).
  • Given the pending review, the usual agreement between an incoming Treasurer and the RBA Governor on the conduct of monetary policy (published as the Statement on the Conduct of Monetary Policy) is being delayed.
• As for the review itself, in our prior AMW we previously looked at the reviews into the US Fed, ECB and RBNZ. We noted then the US Fed (2020) and ECB (2020) reviews were led internally with public consultation. The results of the US Fed review ushered in Average Inflation Targeting and a renewed emphasis on maximum employment. The ECB strategy review adopted a symmetric inflation target of 2%. In many respects the US Fed and ECB reviews were in response to a period of too low inflation.
• The upcoming RBA Review instead will be being conducted in a period of too-high inflation. In this context we do not expect any changes to the RBA’s 2-3% inflation target, with most of the focus of the review likely to be on the RBA as an institution. The RBA itself has also been reviewing its unconventional policy tools internally, after its experience with 3yr YCC and the use of explicit forward guidance.
• Some hints of other areas for review and where change may occur comes from a recent open letter by 12 economists, which included an ex-RBA Board Member (see: Open letter). The letter argues the upcoming review needs to be independent, and look into the three components of the RBA – the RBA Act, the Statement on the Conduct of Monetary Policy, and the RBA as an institution.
• Key areas where changes may occur are in: board composition – the Board comprises nine members, with five out of those being external business people with limited economic experience and who may not be able to challenge the RBA staff; transparency – the Minutes currently are brief and do not indicate any diversity in views and there is no regular press conference post meetings; policy prioritisation – A clearer statement of the relative weight on inflation, maximum employment and financial stability.

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