The nation’s biggest lender says the Reserve Bank board needs to be overhauled to bring in new voices, potentially including union representatives or climate change experts, while formally taking government spending into account when setting interest rates.
In its submission to the independent review of the RBA, Commonwealth Bank on Friday revealed it also believed the Reserve was “a bit of a closed shop” while advocating for board votes on monetary policy to be publicly revealed.
Commonwealth Bank has backed substantial changes to the Reserve Bank board and the way it targets interest rates.Credit:Bloomberg
The review followed a series of articles by this masthead about the central bank’s performance ahead of the COVID-19 pandemic. Academic research has suggested up to 270,000 people spent time out of work ahead of the pandemic because the RBA held interest rates too high.
The bank has also been criticised for rapidly lifting interest rates since May in response to the global outbreak of inflation over recent months. It is expected to increase rates again at its Melbourne Cup Day meeting next week.
Commonwealth Bank chief economist Stephen Halmarick said the review should focus on the future, backing a slight change to the Reserve Bank’s overriding mandate.
The bank is charged with maintaining the stability of the Australian dollar, producing full employment, and ensuring the “economic prosperity and welfare of the people of Australia”. It does this by attempting to keep inflation between 2 and 3 per cent over the economic cycle.
Halmarick said in carrying out its functions, the bank should also explicitly state that monetary and fiscal policy should be “conscious of remaining consistent, especially in times of crisis and/or elevated uncertainty”.
He said the problems in Britain this month sparked by the Truss government’s mini-budget, which forced the Bank of England to buy government debt to stabilise the financial system, highlighted the importance of the relationship between central banks and governments.
“The importance of the interaction between fiscal and monetary policy opens up the opportunity, therefore, for this relationship to be strengthened in the future,” he said.
One growing criticism of the bank has been the structure of the board. It includes a governor, their deputy, the Treasury secretary plus six people appointed directly by the treasurer of the day.
These outside appointments have largely been taken from the business community. The last unionist on the board was former ACTU head Bill Kelty, who resigned in 1996. There is also traditionally just one independent economist.
CBA chief economist Stephen Halmarick says the Reserve Bank board needs to change.Credit:Dominic Lorrimer
Halmarick said the board structure should change.
“The current structure of the RBA board is not compatible with generally accepted best practice for boards in Australia,” he said.
Halmarick said the board should move to a “3-3-3” structure.
That would include three “bank” representatives made up of the governor, deputy and Treasury secretary. Another three members would come from the “economy” and include business leaders, people from small or medium-sized firms, the union movement and “climate change experts”.
The remaining three positions would be experienced economists or monetary policy experts, either from academia, formerly from the banking or consulting sectors, or who operated as independent experts.
The latter three should be people who could “provide constructive challenge on the economy and monetary policy decisions”.
CBA said the six non-RBA and Treasury members of the board should be appointed in an “open and transparent way”, rather than the current secret shortlist, and limited to two five-year terms.
The vote count of board meetings should be made public, but not the individual votes of board members.
RBA governor Philip Lowe has come under fire from homebuyers and monetary policy experts for his commentary, made as late as November last year, that the bank was likely to hold official interest rates steady until 2024.
Halmarick said a timeframe for changes in rates should not be used again.
“The bottom line from our point of view is that forward guidance from the RBA, if it is required, should only ever be conditional or outcome-based –never time-based, either implicitly or explicitly,” he said.
CBA also noted the lack of movement in and out of the RBA by economists.
Halmarick said bringing outside economists into the top levels of the bank when positions such as deputy or assistant governor opened up was one way to expose the RBA to different views.
“Over that time period, I have found the senior members of the RBA to be open and collaborative, as well as intellectually curious, very sound and considered. But there is a general sense that the RBA is a bit of a ‘closed-shop’,” he said.
Submissions to the RBA review formally close on Monday.
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