Australia to introduce legislation to overhaul central bank

Australia’s government will introduce legislation this week to facilitate the largest overhaul of the central bank in a generation, including setting up a separate governance board and scrapping the treasurer’s power to reverse policy decisions.

The Bill is the result of an independent review of the Reserve Bank of Australia (RBA) that made 51 recommendations, some of which require modifications to the RBA’s operating law. It follows criticism in recent years, ranging from the bank’s pre-Covid-19 reluctance to cut interest rates to a pledge that these would not rise before 2024 and a messy yield-target exit, that damaged the institution’s credibility.

The key changes that Treasurer Jim Chalmers highlighted in a statement include:

• Mandating the RBA’s overarching objective to “promote the economic prosperity and welfare of the people of Australia”
• Confirming that monetary policy should have the dual objectives of price stability and contributing to full employment
• Repealing the power of the treasurer to overrule RBA policy decisions

The legislation contains provisions to establish a governance board to oversee the management of the RBA and clarify the central bank’s responsibility to contribute to the stability of the financial system, Mr Chalmers said.

So far, there has been general bipartisan support for the overhaul. However, some elements have drawn criticism from former RBA governor Ian Macfarlane and Mr Peter Costello, Australia’s longest-serving treasurer, who warned that the reforms could erode the authority of the governor.

Mr Chalmers has rejected those suggestions.

The Treasurer is also still to appoint a new deputy RBA governor, saying earlier in November that he intended to make an announcement before the Dec 5 policy meeting, the bank’s last in 2023. The No. 2 role has been vacant since Ms Michele Bullock took the helm of the central bank in mid-September.

The RBA review’s remaining recommendations are being implemented administratively by the government and the central bank, including through a new Statement on the Conduct of Monetary Policy. Mr Chalmers added that the government hopes to finalise the statement in December.

One area the statement is expected to cover, Ms Bullock said on Nov 22, is whether the RBA should focus specifically on the 2.5 per cent midpoint of its 2 per cent to 3 per cent inflation target. BLOOMBERG