FEATURE A ‘NEW ERA’ FOR THE RESERVE BANK? Australia’s central bankers should face greater scrutiny and accountability, argues Stephen Kirchner n 6 December 2007, the incoming monetary policy and weaken the RBA’s account- Labor government announced a ability for infl ation at a time when it is presiding ‘new era’ for the Reserve Bank over the worst underlying infl ation outcomes since of Australia (RBA) with revised the current economic expansion began sixteen arrangements for appointing the years ago.5 Obank’s senior offi cers and external board members, in conjunction with a new joint ‘Statement on Appointment of senior officers the Conduct of Monetary Policy’ between the Under the new statement, the positions of the bank and the government.1 On the previous day, governor and deputy governor of the RBA will the RBA also announced new arrangements for have their level of statutory independence raised communicating with the public about monetary to be equal to that of the Commissioner of policy.2 The RBA board’s press release was careful Taxation and the Australian Statistician. Their to indicate that these measures had been under appointments will be made by the Governor- consideration for ‘some months.’ However, their General in Council, and can be terminated only announcement at the fi rst RBA board meeting with the approval of both houses of Parliament in after the federal election was hardly coincidental. the same session of Parliament. This measure serves Reform of the governance arrangements for the to increase the independence of the RBA’s senior RBA had been expected to be a priority for the new offi cers, in that they can no longer be dismissed by government after more than ten years of neglect ministerial fi at. In practice, however, this was not under the former treasurer, Peter Costello. The a serious threat under the previous arrangements. RBA had also fallen to the bottom of international rankings of central bank transparency.3 While in some respects an improvement, Dr Stephen Kirchner is Principal the new arrangements leave the RBA operating of Institutional Economics and an under an outdated and internationally anomalous Economist with Action Economics, governance structure that is incompatible with LLC. His blog can be found at modern demands for central bank transparency www.institutional-economics.com. and accountability. They also leave in place many of the fl aws from previous iterations of the joint ‘Statement on the Conduct of Monetary Policy’ since August 1996.4 The new arrangements Endnotes for this article can be may serve to entrench bureaucratic infl uence on found at www.policymagazine.com. 18 Vol. 24 No. 1 • Autumn 2008 • POLICY A ‘NEW ERA’ FOR THE RESERVE BANK? The RBA’s senior offi cers have always enjoyed a measures that may actually detract from central high degree of effective independence, owing to bank accountability rather than enhancing central the fact that dismissal would be politically costly bank independence. to the government of the day if the governor and deputy governor enjoyed a strong reputation. Appointment of external International capital markets could also be board members expected to severely mark down Australian-dollar- Under the new arrangements, the Treasury secretary denominated assets in response to any attempt to and the RBA governor will maintain a register of compromise the RBA’s independence. ‘eminent’ candidates of the ‘highest integrity,’ from Section 11 of the Reserve Bank Act 1959 which the treasurer will be required to make new already provides a procedure for resolving policy appointments to the RBA board. This provision differences between the RBA board and the is designed to remedy the situation by which government of the day. The treasurer can override these appointments have been used for political a decision of the RBA board, but this would patronage, most recklessly in the case of former lead to the tabling in Parliament of the board’s treasurer Peter Costello’s appointment of Robert reasons for differing with the government’s Gerard to the board in 2005. The Gerard affair decision. As the most recent joint statement also exposed weaknesses in the ‘Code of Conduct notes, ‘the procedures are politically demanding and their nature reinforces the Reserve Bank’s independence in the conduct of monetary policy.’ The performance of the RBA That no treasurer has invoked these procedures in relation to monetary policy strongly suggests that the existing arrangements and inflation outcomes is already afford the RBA a high degree of effective poorly benchmarked. independence. The RBA’s willingness to raise interest rates in the middle of the 2007 federal election campaign does not point to it being for Reserve Bank Board Members,’ mainly the politically intimidated. lack of effective sanctions for noncompliance. The The new arrangements may instead err in the larger problem under the former government was direction of affording the RBA’s senior offi cers not so much the politicisation of board and senior too much protection. Central bank independence offi cer appointments, but Treasurer Costello’s needs to be balanced with accountability for failure to perform his ministerial responsibilities per formance, especially in relation to infl ation in a timely fashion. The vacancy created by Bob outcomes. Under the new arrangements, it Gerard’s resignation was not fi lled for more than will be even more diffi cult to remove an RBA a year, while the deputy governorship of the RBA governor for poor performance, at least in the was also left unfi lled for fi ve months.6 Warwick absence of a bipartisan political consensus. This McKibbin’s fi rst fi ve-year term on the RBA board compounds a more serious problem, which is expired on 30 July 2006, but the then-treasurer that the performance of the RBA in relation to did not sign off on his reappointment until at monetary policy and infl ation outcomes is poorly least 27 July, leaving his eligibility to participate benchmarked (see below). By contrast, the New in the next RBA board meeting formally in doubt Zealand model establishes a clear relationship until the last minute.7 between infl ation performance and the tenure of The new arrangements serve to protect the the governor of the Reserve Bank of New Zealand, appointments process from undue political including a procedure for dismissing the governor infl uence, but create a new problem in that they for nonperformance. will effectively limit board appointments to those The new arrangements in relation to the who meet with bureaucratic approval from the RBA’s senior offi cers reinforce its independence offi cial family of the RBA and Treasury. This is on paper, but in practice the new government likely to limit the diversity of views represented has addressed a nonexistent problem by taking at board meetings and reduce effective external Vol. 24 No. 1 • Autumn 2008 • POLICY 19 A ‘NEW ERA’ FOR THE RESERVE BANK? scrutiny of monetary policy decision-making. about monetary policy. Governor Glenn Stevens The new appointments process for external board elaborated on the rationale for the RBA’s new members risks entrenching the infl uence of the transparency regime in a speech to the Sydney RBA’s senior offi cers over the monetary policy Institute on 11 December 2007.9 Stevens was decision-making process, at the expense of those careful to dissociate the new measures from the who may have previously been critical of the bank’s change in government, saying that the RBA had monetary policy. It is not clear whether the register ‘refl ected on this for some time this year,’ and that of eminent candidates will be a public document he ‘was very pleased to learn when I met the new that is itself open to scrutiny. The involvement of Treasurer a couple of weeks ago that he supported the Treasury in this process is also at odds with the changes.’ While it is likely that the new measures international trends in central bank reform, which have as much to do with the change at the top of generally seek to increase the degree of separation the RBA in 2006 as with the change of government between monetary policy and the fi scal authority. in 2007, the RBA’s internal consideration of these matters may have been designed to preempt inevitable demands for increased transparency The new appointments process following a change of government. for external board members risks The RBA will now release a statement following each monthly board meeting, even entrenching the influence of the when interest rates are not changed. This brings RBA’s senior officers. the RBA into line with the practices of central banks in comparable countries, and is a marked improvement on the previous arrangements, The Treasury secretary’s continued ex offi cio whereby the RBA simply noted that interest rates membership of the RBA board is also at odds had been left unchanged, without giving reasons. with these trends. The traditional objection to the Indeed, it is only in the last few years that the Treasury secretary’s role on the RBA board is that it RBA has made an announcement of any kind might serve as a vector for political infl uence over following board meetings if interest rates were monetary policy. But a more basic and powerful not changed. The fi rst such statement, following objection is that the Treasury secretary’s role on the December 2007 board meeting, saw a rally in the board is not well-understood. Former RBA bond futures and a decline in the Australian dollar governor Ian Macfarlane said that ‘no one has ever despite a steady interest rate outcome, implying understood whether the Treasury Secretary speaks that the statement conveyed new information to for Treasury or the Treasurer and I still don’t the market, resulting in more effi cient pricing know the answer to that … The only time the of fi nancial instruments.