When a new Treasurer takes office next month, they’ll have the opportunity to tell the RBA how to do their job. Unlike every other time when an outsider offers some free advice to our central bankers, in this case they’ll listen. In fact, they’re more or less obliged to. The Treasurer is the only person in the country who can overrule them, thanks to the section of the RBA Act known as the Montagu Norman Clause. Unlike many of his predecessors, Chris Bowen seems diligent and thoughtful, so I’m sure he’ll want to adjust the RBA's rules of engagement in the best way he can.
The most important thing he could do is: don’t screw things up. A few people want to wind back central bank independence, which would be a train-wreck. And earlier this week, someone ventured the idea of lowering the inflation target, which was apparently offered as a serious contribution to policy debate, and not as the nihilistic embrace of stupidity it effectively is.
But the Statement on Conduct needs some work.
First of all, it should define “medium-term” explicitly. The current text describes the goal as “between 2 and 3 per cent, on average, over time”, which “provides flexibility”. Indeed. Right now, the Bank takes “medium term” to mean whatever time period it needs to get inflation back in the band. It needs a clear time limit to keep itself honest.
The statement also needs to remove financial stability from the monetary policy objective. The current text is stretching Tinbergen’s Rule—no more targets than policy instruments—past breaking point. What that means in practice is that policy has been held too tight for the last few years because the staff are scared of inflating house prices in Sydney and Melbourne any further. They should let APRA and the States’ planning ministries deal with that, and stop hoping that they can hit a 7-10 split by themselves.
Third, the RBA should increase transparency by publishing the Board papers. Recently the Bank has been publishing official minutes after each meeting, which is nice, but they’re edited to the point where nothing remains beyond vague platitudes. The public should be able to read the actual briefings that the staff give to the Board each month. Some parts of the papers are commercially sensitive, but those sections can simply be redacted or published with a delay. The staff may feel nervous about having their reasoning picked over in public, but the status quo has people picking over what they speculate the staff’s reasoning might be, which is worse.
Finally, Bowen should also appoint three academic board members. It’s an open secret that the appointed members of the RBA Board are essentially ballast. At the monthly Board meetings, they perform two functions: eat sandwiches, and approve the recommendation made by the staff. In recent years, all the appointed members have been current or former businesspeople, not one of whom has had any expertise in monetary policy. It would be a better use of everyone’s time to end the charade.
One option would be to fire all the appointed members and leave only the senior Bank staff and the Treasury Secretary, which would at least save on catering. Alternatively, the Treasurer could use the 3 or 4 vacancies that will open during his tenure to appoint some Board members that the staff respect. Academics who work on macroeconomics would be able to ask some probing questions, which would help the staff clarify their thinking.
Once those changes are made, the Bank can get down to the business of setting monetary policy. All they have to do is set employment to full, and keep inflation low. Simple.