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A Shift in the Winds for the RBA

The Government has just released the findings that outline 51 recommendations of the independent committee that has been reviewing the RBA since July last year. The government for their part has endorsed all of the recommendations, and will seek to legislate on the subset that requires amendments to the Reserve Bank Act.

The most significant recommendations relate to the dual mandate of the RBA and recommends the splitting of the board structure into separate policy-making and governance limbs. It also recommends a reduction in the board’s meeting frequency in relation to policy decisions.

What Does This Mean?

The report contains 51 recommendations but key recommendations of importance for markets are:

  • The independence of the RBA and the 2-3% inflation targeting framework will be maintained.

The report recommends a renewed Statement on the Conduct of Monetary Policy be put in place by the end of 2023 and directs the RBA to target the midpoint of the 2-3% range to provide more clarity and accountability.

  • A new Monetary Policy Board (MPB)

The new MPB will be created with responsibility to enact monetary policy, with the existing Board to manage other operational and governance matters. The MPB will be comprised of the Governor and Deputy Governor, the Treasury Secretary, and six external experts – appointed for five-year terms. This will allow greater challenge to the views presented to the Board, one of the criticisms of the report.

  • Maintains flexibility

Importantly, the report does not remove the flexibility that the RBA enjoys by setting any timeframes in which inflation if exceeding the range, should be returned to target. The report does require the RBA to provide clarification of the state of employment relative to full employment and directs the RBA to target the midpoint of the 2-3% range and drops ‘on average, over time’.

  • Number of meetings

The report recommends that the Bank should hold eight meetings per year - instead of the current eleven meetings – as is the practice of other major central banks.

  • Greater transparency

The Governor will be required to hold press conferences after each monetary policy meeting to explain the outcome of the meeting and the strategy of the MPB to further increase transparency of discussions and decisions. For even further transparency, the unattributed votes of the MPB will also be released. Additionally, external members of the Monetary Policy Board will be allowed to discuss decisions and their thinking publicly. Debate on appropriate policy will likely therefore be more transparent.

Consequences

Few believed that the 2-3% inflation target band was likely to be changed and while the recommendations look for the RBA to target the mid-point, there is no real impact.

Implications for monetary policy would mostly likely come through changes to the structure and composition of the board. The recommendations also bring to question whether the existing governor will seek or be granted another term. Implications for the recommendations are still being worked through but changes that dilute the power of Governor Lowe and suggestions his term will not be renewed this year would be perceived as hawkish by the market. Those that added representation by organized labour would be perceived as dovish. 

Even the proposed reduction in meeting frequency from 11 to 8 per year still needs working through. Governor Lowe has argued the RBA’s relatively high meeting frequency allows the board to take smaller more frequent steps compared to others. Lowe argued that delivering a given magnitude of hikes over a longer period can help remind the public that conditions are tightening, and so help anchor inflation expectations.

For now, we wait to see whether the RBA will move ahead in adopting some of the recommendations of the review ahead of time. Recommendations like holding press conferences would be simple to implement but targeting the midpoint of the target band more explicitly in the Board’s thinking in the near term would be a more significant one.

Events this week:

With another four-day week ahead of us, local focus will be on the March employment report (Thursday) and NAB business and consumer confidence surveys.

Overseas, on Wednesday we will see the US March CPI report. While the headline rate is seen dropping to 5.1% from 6.0% thanks in large part to sharp year on year fall in energy prices, the focus is on the core (ex-food and energy) reading where all the talk is around stickier inflation.

FOMC Minutes are on Thursday, while the US earnings seasons kicks off with particularly keen interest in the banking sector given all the recent turmoils.