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Treasurer Jim Chalmers will axe one of the few ways he can control a Reserve Bank governor while also preventing the RBA from directly lending to particular companies or industries as part of his overhaul of the institution.
In what amounts to the ultimate surrender of possible government control of the bank governor, Chalmers will use sweeping new legislation of the Reserve Bank this week to end the ability of a treasurer to override an RBA decision.
Treasurer Jim Chalmers will surrender one of his remaining powers to control the Reserve Bank as part of his overhaul of the institution.Credit: Alex Ellinghausen
He will also abolish a power the Reserve has held under its governing legislation since 1959 to direct the lending activities of private banks, which members of the extreme left and right have argued should have been used in recent years.
The review of the Reserve Bank, released in April, recommended sweeping changes to the institution, which, unlike its overseas peers, had not undergone an independent evaluation since the early 1980s.
The review was prompted following a series of articles by this masthead about the bank and its handling of monetary policy ahead of and during the Covid pandemic.
As revealed by this masthead at the weekend, the biggest single change will be the creation of a board that will set official interest rates, while a governance board will oversee the RBA’s day-to-day operations.
The bank’s mandate will be narrowed to targeting inflation and contributing to full employment while it’s overarching focus will be to “promote the economic prosperity and welfare of the people of Australia, both now and into the future”. This had been one of the bank’s mandates since 1959.
But Chalmers will go further, including axing his own power to override a Reserve Bank decision in what amounts to the only ability a government has to directly interfere with monetary policy. The power has never been used, in part because of the reputational damage it would cause to the bank and treasurer of the day.
In recent months, the Greens have demanded Chalmers use the power to reverse RBA board decisions to lift official interest rates.
It leaves the only control over the bank to the appointment of the governor and board members.
Chalmers said the aim of all the changes was to strengthen the bank while also refreshing key economic institutions, such as the Productivity Commission.
“We want to ensure Australia’s central bank remains world-class with a monetary policy framework fit to meet our current and future economic challenges,” he said.
“These changes are part of the Albanese government’s broader efforts to reform, renew and refocus the nation’s key economic institutions so that they can help meet current and future challenges.”
Another change will be to the length of time people can sit on either the RBA’s monetary policy committee or its governance board.
Traditionally, these have been 5-year terms with most RBA members given 10 years with the organisation. Economist Ian Harper, a current board member, was appointed in mid-2016 and will not finish his term until 2026.
Reserve Bank governor Michele Bullock will head regular press conferences to explain RBA decisions from next year.Credit: Wolter Peeters
The RBA review recommended a maximum term of 5 years which could be extended by a single year. Chalmers will vary this to two years to ensure there is a balance between experience and fresh faces on the two key RBA boards.
Some of the changes to the bank are already being overseen by governor Michele Bullock.
From February, monetary policy decisions will be made at 8 two-day meetings a year rather than the current single day monthly meetings. A press conference will be held after the meeting which Bullock noted last week would be attended by journalists.
Bullock’s predecessor, Philip Lowe, became the first governor to hold a press conference when he held several to announce key decisions relating to the RBA’s handling of the Covid pandemic.
The new monetary policy setting board is expected to be operational from the middle of next year.
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