Monetary Policy Shake-Up for Reserve Bank

Following an independent review of the Reserve Bank of Australia, Federal Treasurer Jim Chalmers has endorsed recommendations to split out the monetary decision-making function.

Chalmers released the 300-page review and its 51 recommendations this week.

One of the main recommendations was to create an expert board for setting interest rates that would meet eight times across 12 months, rather than monthly. 

Federal Treasurer Jim Chalmers said it would reduce interest rate shock and enable householders to absorb the changes more easily. 

The review found the bank would have benefitted from “stronger decision-making arrangements” and a more specialist board during Covid when the bank reduced the cash rate to a record low and printed billions of dollars.

It also found the central bank was slow to respond to last year’s runaway inflation, criticising its focus on wages growth as a driver of price increases.

▲ Reserve Bank of Australia governor Philip Lowe said the review was about strengthening a well-functioning institution. 

Reserve Bank of Australia governor Philip Lowe said he welcomed the recommendations from the review. 

“The recommended changes could also strengthen the monetary policy process, by having a board whose sole focus is monetary policy,” Lowe said. 

“I very much welcome the conclusion that this board should include people with diverse perspectives and knowledge and who have experience in decision-making under uncertainty. It is also pleasing to see that the panel recommended that the Treasury Secretary remain on the board.

“We will work constructively with the government and parliament with the aim of ensuring that any changes to legislation are effective in achieving their objectives.”

It could be good news for homeowners staring down the barrel of further interest rate hikes this year. 

PEXA’s Emerging Mortgage Risk report showed nearly half of all NSW suburbs would be considered high mortgage risk by May this year. 

PEXA head of research Mike Gill said the data showed the extent to which more Australians were being challenged in the current economic climate. 

“With interest rates continuing to rise and the cost of living also squeezing the budgets of households, there has been a pronounced spike in the number of families facing more immediate mortgage risk,” Gill said.
 
“In addition to these factors, with an estimated 800,000 fixed-rate loans due to expire during 2023—and reset at a significantly higher cost—it’s easy to see why refinance volumes are at a record high as mortgagees seek to strike a better deal. It’s clear that lending pressure is set to stay in the months ahead.”