RBA Reforms Raise Uncertainties Over Rate Path, Economists Say (2024)

(Bloomberg) — Australia’s surprise late-night passage of legislation that will split the Reserve Bank’s board into two entities may pave the way for it to reveal votes similar to the Federal Reserve, while also raising uncertainty over the future path of interest rates.

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“The new monetary policy board is key — who will be on it, who transfers over from the current board, how many new members and their background,” Su-Lin Ong, chief economist at Royal Bank of Canada, said Friday. “It will likely take some time for markets to assess where on the spectrum of dove/hawks the members sit.”

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The legislation follows an independent review of the central bank, which called for wholesale changes to the RBA’s operations, some of which were enacted this year including fewer policy meetings and regular press conferences by Governor Michele Bullock.

The composition of the new monetary policy board, which will take effect following the RBA’s Feb. 17-18 meeting, is still unclear. Bullock, Deputy Andrew Hauser and Treasury Secretary Steven Kennedy will be on the body while the other six external members — who are currently mainly drawn from business and academia — will be appointed by Treasurer Jim Chalmers

It is possible that many of the current external members will move to the new governance board, opening up slots for new appointees to the monetary policy committee. Bullock has previously said that she’s had discussions with current board members to gauge their preference while adding she’d want some “continuity” on both of the new bodies.

Bullock didn’t disclose the preferences of current board members.

“The changes raise the uncertainty around the RBA’s reaction function going forward given potential new board personnel,” economists at Goldman Sachs Group Inc. wrote in a note to clients.

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The RBA has kept policy on hold since last November, with its benchmark rate at a 13-year high of 4.35%. On Thursday, Bullock reiterated that core inflation is still “too high” to consider rate cuts in the near term. The rhetoric prompted economists at ANZ Bank to push back their call for the start of the RBA’s easing cycle to May, from February previously.

Financial markets see a 1-in-3 chance of a 25-basis-point cut in February with an easing in May fully priced in.

The dual board framework was originally intended to be in place by mid-2024, but differences between the Labor government and center-right opposition over its composition had delayed passage of the bills. Ultimately Chalmers did a deal with minority parties to get his signature reform through parliament.

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Once the new structure is in place, Bullock will decide whether to publish unattributed votes from the meeting and have board members deliver speeches.

In explaining the need for a separate policy board, the RBA review in 2023 found the current entity provides only “limited challenge” to the views of top bank officials and that its skillset is “not matched to the complex and uncertain economic environment in which monetary policy will increasingly operate.”

As a result, the review recommended the six external members have diverse economic backgrounds and have direct access to RBA staff. They will work part-time, equivalent to about one day a week.

Under the current structure, the governor is appointed for a seven-year term and the deputy governor for five, and both are eligible for reappointment. Non-executive directors are appointed for terms of five years. Typically, they serve a maximum of two terms.

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