Missing Down Under: a completely modern central bank

Comment

Here are some fresh ideas for the new year: Give monetary experts more say in setting interest rates and get central banks to hire more economic historians.

As blatantly obvious as these suggestions are, they would represent a major shift for the Reserve Bank of Australia. The RBA has an enviable reputation internationally, lauded by Federal Reserve officials, but lags behind global benchmarks in some of the foundations of modern policy, reporting and accountability. The bank escaped scrutiny because it presided over three decades without a recession, until the pandemic.

That’s all changing, courtesy of a government-commissioned independent bank review. Written comments were recently issued to the three-person panel of external experts. Some no doubt reflect the pain caused by high inflation and the RBA’s delay in addressing it. More significant are those involving long-term weaknesses in culture, governance and interaction with the public and markets. There are also significant global lessons, especially in the scathing criticisms of early driving. Other central banks should take note. The timing of the performance review is also complicated for Governor Philip Lowe, whose term expires in September, and who hopes to be reappointed.

Contributions from economists at the Commonwealth Bank of Australia and the Royal Bank of Canada hit an obvious shortcoming on the RBA’s board: a relative scarcity of monetary experts. Unlike their counterparts to the Fed and European Central Bank, most of the RBA’s rate-setting panel is part-time. These appointments should reflect a broad spectrum of economic and social life. They are licensed to hold outdoor concerts as CEOs, college presidents, or directors. In the past, these have included mining and retail executives—often in good standing with the federal government at the time—and perhaps a professional economist or two. In theory, this reduces the chances of capture by narrow interests or groupthink. In practice, it may mean that they lack the skills to stand up to the governor, deputy governor and bank staff. (The top Treasury bureaucrat also sits on the board.)

Equally problematic is that there is no record of votes being taken on interest rates. In principle, this rewards consensus, which is vital in times of crisis where dramatic changes may be needed. It also dilutes responsibility. The public ends up getting the mainstream view of the RBA, but little sense of areas where there might be dissent, or at least some tension. The RBA is, again, an outlier: The Fed, Bank of England, Bank of Japan and Bank of Korea – among others – publish voting records.

Communications are another shortcoming. Almost unique among serious central banks, the RBA does not have regularly scheduled press conferences. The bank rightly says it is doing much more than in the past and has held press briefings in recent years where major policy changes have been undertaken. Lowe also developed a habit of giving speeches immediately following board meetings with extensive question-and-answer components. But this is the bare minimum, not something that should be commended.

Some of the harshest criticisms in review presentations are devoted to forward driving. That’s an easy target, given the bank’s deeply flawed suggestion that rates may not have to hike until 2024, a timeline Lowe stuck with until late last year. The problem is, whatever caveats and qualifiers officials put on such guidance, people are latching on to furry large numbers. Lowe often compares himself to the 2024 line, although he emphasized at the time that it was a projection rather than a promise. In the list of things he would do differently, it would probably be at the top of the list. But does this mean that a key central bank tool needs to be abandoned entirely? The RBA has subsequently expressed a preference for a more modest prognosis.

Stephen Grenville, former deputy governor of the RBA, said in his presentation to the review that driving should be reduced to something fundamental. Officials could do worse, he said, than he adopt something like former ECB president Mario Draghi’s famous line in 2012 that he would do “whatever it takes”. The advantage, wrote Grenville, is that such a construction is “clear in its goal and determination to achieve it, but imprecise as to detailed implementation.”

And what about the background of the people developing and implementing the policies? The RBA is often chastised for a lack of diversity and an introverted internal culture. Successive governments have often exacerbated the problem by promoting insiders to higher posts. Lowe and his two immediate predecessors were lieutenant governors at the time of their elevations.

Selwyn Cornish, who wrote an official history of the RBA, goes deeper. A big challenge, he said, is the lack of historians at the bank. Tackling this shortage should be a priority. “While I was very impressed with the theoretical and quantitative knowledge of the bank’s economic staff, they don’t seem to know much about the history of the Bank, the history of central banking in general or the economic history of this or any other country,” he said. Cornish, an adjunct professor at the Australian National University This is a damning assessment.

The final audit report is expected to be delivered to Treasurer Jim Chalmers by the end of March. There is a reluctance to proceed with anything that requires a change in the law; the ruling Labor Party does not have a majority in the Senate. However, there is much here that can be done without legislation. Chalmers and Lowe could proceed immediately to press the agenda items: advice that matches global best practices and can sustain a record public vote. There is also a need for a communications strategy that brings the RBA into line with other advanced economies and many emerging markets as well.

Had Australia not experienced such enviable growth since the early 1990s, the pressure for these changes might have erupted sooner. Success has tended to overshadow flaws. While it is a stretch to describe the current circumstances as a crisis, it would be a real shame if the moment were to be wasted. If Chalmers really wants the big bang, he could do worse than call Draghi. After eight years at the helm of the ECB, he had a short and intense tenure as Italian prime minister. A consulting stay in Sydney can have a certain charm. More from Bloomberg’s opinion:

• Great interest rate retreat begins in Asia: Daniel Moss

• Like the BOJ, central banks will pivot in 2023: Marcus Ashworth

• For the Federal Reserve, a warning from the 70s: Niall Ferguson

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This column does not necessarily reflect the opinion of the editorial board or of Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was executive editor of Bloomberg News for economics.

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