Political ‘soap opera’ derails Australian central bank reform

A political impasse is threatening a once-in-a-generation reform of the Reserve Bank of Australia aimed at improving the central bank’s much-criticised record on monetary policy after a post-pandemic inflation surge.

The centrepiece of the reform — which was billed as the biggest shake-up in the central bank’s six-decade history when it was unveiled last year by Labour treasurer Jim Chalmers — is the establishment of a separate monetary policy board within the RBA to decide interest rates.

But rival political parties that originally supported the plan, which would bring the RBA into line with global peers including the Bank of England and the Bank of Canada, have in recent weeks turned against it.

The central bank and its interest rate policy has become a “political football”, said Shane Oliver, chief economist at investment manager AMP Capital. “Everything around the RBA is now like a soap opera.”

Australia’s Labor government needs buy-in from other parties to pass the reform legislation through the senate, where it holds only 25 of a total 76 seats.

But the opposition Liberal party, which first announced a review of the RBA when it was in power in early 2022 and had indicated its support for the bill until recently, withdrew its backing this month.

Angus Taylor, shadow treasurer, told the Financial Times the party had retracted its support over concerns Labor would control appointments to the new monetary policy board, potentially politicising the RBA.

“The independence of the central bank is not something we’re willing to risk. To undermine that would be disastrous. Sacking and stacking the board is not something we can support,” Taylor said, describing the impasse as “insurmountable”.

Chalmers, who accused his counterpart of “weakness” over the breakdown this month, has said he repeatedly offered assurances that his government would not stack the new board with political appointees.

In a statement to the Financial Times, he said he had pursued a bipartisan approach aimed at “modernising and strengthening the Reserve Bank for the future”.

“Whenever the opposition has a put a view to us, we have accommodated their view,” Chalmers said.

The Liberal change of heart has left Labor courting the much smaller Greens party. But the Greens said this week they would only support the bill if the government used its powers to override the RBA and force it to cut interest rates — or if the bank did so of its own volition — arguing that monetary easing was necessary to help renters and mortgage holders.

Both major parties derided the Greens’ proposal, saying that forcing the RBA to cut rates would undermine its independence. “They’re economic terrorists and you can quote me on that,” Taylor said at the prospect.

Prime Minister Anthony Albanese said on Monday that acceding to the Greens’ demand would amount to undermining the independence of the central bank in order to pass legislation strengthening its independence. 

But the Greens questioned why the central bank should be treated as “above politics”.

“The RBA board are not infallible high priests of the economy who are above criticism,” said Nick McKim, a Greens senator.

On Tuesday, the RBA board kept its key cash rate at 4.35 per cent for the tenth straight month, saying it maintained its view that inflation was not yet under control. It declined to comment on the political pressure for a cut.

The policy board reform was one of the recommendations of a wide-ranging independent review of the RBA launched in July 2022, after the bank was accused of being too slow to respond to a jump in post-pandemic inflation, triggering a cost of living crisis.

Philip Lowe, then governor of the RBA, admitted that its forecasting had been “embarrassing”.

RBA governor Michele Bullock, who was promoted to the role a year ago, has backed the new monetary policy board, saying it would simplify management of the central bank, which has other responsibilities including handling the government’s banking and welfare payments.

Bullock played down the impact of the political deadlock, arguing that many of the review’s recommendations had already been implemented, making the bank more responsive and improving the board’s access to monetary policy expertise.

“If it turns out we get new legislation with a new board then we’ll be in a good position. And if we don’t, we’ll be in a good position,” she said on Tuesday. 

Paul Bloxham, HSBC chief economist for Australia and New Zealand, said the RBA had already adopted many internal changes “in the spirit” of the review. For example, its board — which includes academic and business figures — was holding longer sessions ahead of interest rate decisions to receive more substantial input from monetary policy experts. 

Some observers argued the RBA could even benefit from the law being blocked. AMP’s Oliver said the proposal to establish a separate monetary policy board was “poorly justified”, with little evidence as to how it would improve performance.

“It’s questionable as to why we need to move to this structure,” he said, crediting the RBA with playing a role in Australia’s economic resilience over the past four decades.

But Isaac Gross, an economics lecturer at Monash University, warned that the impasse could undermine the RBA’s capacity to deal with future economic crises.

“It was the crown jewel of the reform,” he said. “You want the institutional structure and brain power so that you don’t make similar mistakes in the future that you did in the past.”