The Reserve Bank is set for its biggest overhaul in decades, after a review into the central bank found it needed major changes to ensure it is "fit for the future".
Treasurer Jim Chalmers has given in-principle support to the 51 recommendations, which largely seek to ensure decisions about the cash rate are made with a broader input, and the reasons for its decisions are made clearer to the public.
The 294-page review Mr Chalmers has released looks to make wide-reaching changes to the RBA, including splitting its board in two and bringing in more external people to make rates decisions and oversee the central bank.
It finds the current Reserve Bank board provides only "limited" challenge to the views of the governor, and it lacks the economic expertise of decision makers at other central banks worldwide.
There has been widespread criticism of the board and governor Phil Lowe in the wake of his 2020 prediction that rates would not rise for three years.
Millions of Australians have felt the full force of the RBA's rate hiking in the past year, a move the board has been making to counter soaring inflation. The review heard from people who viewed the decision to increase rates earlier than forecasted as a "broken promise".
The review makes no recommendation about the future of Mr Lowe, whose term ends later this year.
"This Review is not a judgement on the past six months. We have looked back over three decades," the review states.
Speaking after the release of the review, Mr Lowe said the board would seek to implement the recommendations.
"As times change, we need to change too," he said.
"The review will help us do that."
Mr Chalmers used the release of the report to announce two new appointments for the board — former Fair Work Commission president Iain Ross and Telstra director Elana Rubin.
Single RBA board split into two
A monetary board would look only at monetary policy decisions and not corporate governance, while a corporate governance board would oversee the management of the organisation.
The current board is made up of two RBA members, the Treasury secretary, five businesspeople and an academic.
The review recommends the monetary board should comprise the governor, the deputy governor, the Treasury Department secretary and six external members. The governor would chair this committee.
"By including six external members, the monetary policy board would be weighted in favour of external members," the review states.
"This would provide a healthy counterbalance to the influence of internal members."
The six members, who would serve for five years with staggered end dates, would be experts in macro-economics, monetary specialists and labour markets. Their recruitment would have to be open and transparent.
Mr Lowe said he backed splitting the board in two and conceded the current arrangements failed to meet modern standards.
"There's a great deal of scrutiny and public visibility and commentary about our monetary policy decisions, but there is much less oversight how I discharge my responsibilities to manage the RBA," he said.
"I think it's true to say that from a number of perspectives, the current oversight arrangements as me as governor for managing the bank fall short of contemporary standards."
Changes to how often the board meets
Currently the RBA board meets 11 times a year — on the first Tuesday of every month except January. The review has recommended this changes to meetings eight times a year, a move it argues will give the monetary board a better chance to reflect on previous decisions and take more advice.
One of the more high-profile recommendations is for the governor to hold a press conference after each monetary board meeting. A post-meeting written statement should also report unattributed votes on decisions.
While the governor's role on the monetary board would be largely unchanged, the review recommends they do not chair the governance board.
The governor would be a member of that board, along with the RBA chief operating officer and five external members, each serving for five years. One of these external members would chair the governance board.
Separating the monetary and governance boards would bring the RBA into line with similar banks in England and Canada.
The review was authored by Australian National University professor Renee Fry-McKibbin, former senior Treasury official Gordon de Brouwer and Canadian central banker Carolyn Wilkins.
They recommended the RBA should take account of climate risks but not use monetary policy to address them.
The government would need to pass legislation to implement the changes, which it hopes would take force in July next year.
Reinforcing the board's independence
The review, and government, have repeatedly flagged the importance of the RBA being independent from the government of the day.
Consultation with current and former RBA members "highlighted the value" of having the Treasury secretary on the board, but some submissions raised concerns about "actual or perceived interference with the RBA's independence".
In England and New Zealand, the Treasury secretary attends meetings but does not vote, while at most other central bank boards they do not attend monetary policy meetings.
The reviewers have recommended the Reserve Bank Act be updated to clarify that the Treasury secretary is serving on the monetary board in an individual capacity and not at the direction of the treasurer.
“This is about bolstering the independence of the Reserve Bank, not diminishing its independence,” Mr Chalmers said.
“And my goal here throughout is a world-class central bank, which is more effective more transparent, and more independent, calling on more expertise to make its important decisions."
To further enhance the RBA's independence, the reviewers have urged the government to repeal part of the RBA Act that sets out the ability for it to override decisions of the bank board. These are powers that no Australian government has ever used.
"The current legislation creates the risk that the government wields, or threatens to wield, power in a way that undermines the independent operation of monetary policy," the review states.
"Parliament should define the RBA's objectives and independence through the underlying legislation, without the option for overrule by executive government."
The review does not call for major changes to the overall aims of the bank – including keeping inflation within a target of 2 to 3 per cent.
It suggests significant changes to how the bank is run internally, arguing a need for cultural change inside the bank, and a new focus on explaining decisions to the public.
Mr Lowe welcomed the recommendations and said the board would seek to implement them.
Picking a RBA governor
Mr Lowe served as an assistant and then deputy governor of the RBA before assuming the top job in 2016.
His seven-year term expires in September and there has been vocal criticism within Labor and the Greens urging the treasurer against reappointing him.
These calls grew louder as the bank continued to lift interest rates in the past year, despite his now infamous 2020 guidance that the cash rate would not change for three years.
The reviewers recommended the treasurer should be responsible for choosing the governor and deputy governor.
Prior to the release of the review, the opposition and crossbench were briefed about the recommendations.
Mr Chalmers has repeatedly said he would make a decision about Mr Lowe's future closer to September.
His appointments of Mr Ross and Ms Rubin replace Wendy Craik and Mark Barnaba, whose terms expire in the coming months.
Mr Chalmers said Mr Ross, a former lawyer, would bring a deep understanding of labour markets and economics to the board.
"I do think workers do deserve a voice around the Reserve Bank table, and I think Mr Ross's appointment is satisfying an important objective, which is to make sure that the wages and living standards of ordinary workers are considered and contemplated as the Reserve Bank takes decisions," he said.
Mr Chalmers said Ms Rubin had more than 20 years of corporate board experience and had a background in the financial services, infrastructure, property, tourism and manufacturing sectors.
