5 things you need to know about the latest RBA shake-up

A group of people look intently towards the camera as though they are very interested in the information they are hearing.

A group of people look intently towards the camera as though they are very interested in the information they are hearing.

One of the biggest pieces of news in the financial landscape today has nothing to do with the ASX share market or ASX shares. At least directly. Today the federal government has released its long-awaited review of our central bank, the Reserve Bank of Australia (RBA). 

The government commissioned a review of the RBA last year. The final report was delivered at the end of last month but today, the review, as well as the government’s decided actions, have been publically released.

The report made 51 recommendations for change to the RBA, all of which have been accepted by the government. It will result in one of the largest shake-ups to the RBA in its history. So let’s dive into the five things you need to know about the RBA and the changes it will be subjected to.

5 things you need to know about the latest RBA shake-up

Full employment will be part of the RBA’s mandate

Full employment is officially set to become part of the RBA’s official mandate through legislation. As it exists now, the Bank has three overarching objectives. Those are price stability in the economy, the maintenance of full employment, and the “economic prosperity and welfare of the people of Australia”.

The RBA’s mandate will now be narrowed to the twin objectives of price stability and full employment, with an overarching framework of economic prosperity. 

This may not sound like a big change. But it could have an impact on future RBA decisions when it comes to interest rates, as the bank now has to treat the dangers of high inflation and high unemployment with equal weighting.

There will now be two RBA boards

Right now, there is but one RBA board. This board fulfils most of the Bank’s primary functions, including the setting of interest rates. But the review recommends that the board be split into two separate entities.

One will continue to focus on monetary policy and set the cash rate for the economy. The other will focus on the internal governance of the RBA.

The review found, “The Reserve Bank Board’s current processes do not provide members with enough information, time or support to sufficiently explore policy options and strategies or to challenge RBA views.” It recommends the two boards change in order to “deepen the Board’s deliberation on monetary policy and ensure it is open to a wide range of inputs”.

No more ten-month streaks

As it currently stands, the RBA meets 11 times a year to decide the course of interest rates. As such, the first Tuesday of every month (except January) has become a highlight on the calendars of most financially-interested people. That is set to change.

The RBA’s monetary policy board will now meet eight times a year, rather than 11. (So perhaps the annual overlap with the Melbourne Cup every November will finally come to an end.) But the ten-month streak of interest rate rises that was only broken earlier this month is unlikely to be repeated with these new changes. 

Business input will be diluted

Right now, the RBA’s board consists of members that are drawn from business and industry. That is set to change. 

The review found the following conclusion when it came to these kinds of experts on the board:

Currently, the Reserve Bank Board provides only limited challenge to the RBA executive’s view and its skillset is not matched to the complex and uncertain economic environment in which monetary policy will increasingly operate. 

The external members of the Board have been outstanding leaders in their fields. However, collectively they have less economic and financial market expertise, and spend less time on monetary policy, than decision-making bodies at comparable central banks.

So the review wants this tightened up. This could mean future RBA board members might come from a narrower range of backgrounds, with an emphasis on economic experience. 

The 2-3% inflation target is set to stay

One of the biggest speculations, when it came to this RBA review, was whether the 2-3% inflation target would stick around. The review has endorsed this target, stating that “it is well understood, it is credible to the public, and has supported good economic outcomes”. It also noted that “there is sound evidence that it has supported stable inflation expectations over the past three decades”.

However, the review also recommended that the target should be refined somewhat, with a focus on the midpoint of the range (2.5%). This will, according to the review, “maximise the chances that the target is met”, as well as “providing a consistent focal point for future inflation should help to better anchor inflation expectations in the centre of the range”. 

The post 5 things you need to know about the latest RBA shake-up appeared first on The Motley Fool Australia.

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