RBA review needs to set bank up for future economy

That is one of the prime motives highlighted by Treasurer Jim Chalmers who, on Wednesday, outlined a panel of three experts would conduct the first comprehensive review of the Reserve Bank this century.

Dr Chalmers, in his statement, flagged Australia is "facing a complex and rapidly changing economic environment".

And he is right.

Bigger risks from climate change, technology and a transitioning economy are all components the current settings implemented in the 1990s did not comprehend.

The economy of the 90s was a lot more guarded compared to the highly integrated global financial systems now in place.

In the last century, non-central bank currencies, such as crypto, did not exist.

So a review into how money flows through our economy is another aspect as to why the main purpose of the bank of price stabilisation needs to be scrutinised.

Economists are also urging the review to outline an expansion of the board and greater transparency around the decision-making of members.

Calls also include the board to include more independent experts outside of the bank, who can give broader views in the national interest.

Board members are appointed by the current Treasurer, which shows sectoral interests are informing decisions rather than a non-political,

These views, held by a number of economists, indicate that the decisions made by the bank are done mostly behind closed doors.

The public does not know the view of each member, nor has been properly communicated about varying scenarios the bank has considered.

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The communication aspect of the bank is something which garnered criticism after it decided to begin lifting interest rates in May.

It had initially stated rates would not rise until 2024.

A number of economists and stakeholder groups believed the bank should not have placed a timeline on lifting rates, but rather a set of scenarios which would detail to the market ways out of the pandemic measures put in place.

The rationale behind the bank's timeline was based on the yield target measures it implemented during the pandemic.

Dr Chalmers also outlined the review would investigate whether fiscal measures implemented by the federal government are in coordination with monetary policy.

Interest rate hikes are a very blunt and broad brush instrument at combatting economic challenges. The review will likely look at when either lever would be more effective to use.

RBA Governor Philip Lowe welcomed the review, saying this is an "opportunity to take stock" of existing settings and to "make sure that they are fit for purpose for the challenges ahead".

But culture and management are also aspects of this review, and questions will be asked whether the governor and senior management have been effective in managing monetary policy.

The RBA tries to remain apolitical, but political vultures will be circling the review and will be ready to prey on any fallout it may cause.