.png)
The Reserve Bank of Australia (RBA) is facing a major overhaul following an independent review.
What does it mean for interest rates and for Australian mortgage holders? We dive into all your questions in this article.
Why was there a review?
Treasurer Jim Chalmers announced the review in July 2022 – the first review of the RBA since the central bank started to target inflation in the early 1990s.
“The Review is all about ensuring Australia’s central bank and monetary policy arrangements are as strong and effective as they can be into the future,” Treasurer Jim Chalmers said.
The final report, ‘An RBA fit for the Future’, was released on April 20, 2023. It looked at the RBA’s performance over the past three decades.
What were the key recommendations?
The review made a lot of recommendations – 51 to be precise. The gist was for decisions about the cash rate to be made with broad input, and the reasons for any changes to be much clearer to the public.
Some of the key recommendations included:
The RBA should have a ‘monetary policy board’ with greater economic expertise and shift to eight meetings a year (instead of 11) to allow more time to consider issues.
There should be a press conference after each meeting to encourage more transparency, and board members should speak publicly about the board’s work.
Two separate boards should be established – one for monetary policy, the other for governance of the RBA.
The inflation target of two to three per cent should be retained.
There should be five-yearly reviews of the RBA’s monetary policy framework and policy tools.
So, what’s next?
The government is expected to legislate changes relating to the review from next year. Mr Chalmers has indicated he is hopeful the changes to the RBA could take effect by July 2024.
Meanwhile, RBA Governor Philip Lowe welcomed the recommendations. “The board will consider these issues over coming meetings and develop and implement a new set of arrangements,” he said.
What about the impact on interest rates?
As mentioned, the RBA currently meets 11 times a year on the first Tuesday of the month (except in January) and the board makes a decision about the cash rate. After the decision, lenders decide whether to adjust their interest rates.
If the recommendations of the review go ahead, the monetary policy board will meet 8 times a year. There will be more time between meetings for the board to weigh up the latest economic indicators before making a decision.
In other words, homeowners won’t get back-to-back rate hikes (or pauses or cuts) every month.
And with fewer cash rate changes, there will be more time for households to adsorb and adapt to any cash rate hikes.
On the flip side, with fewer meetings, it may also be necessary to make larger changes to the cash rate (which has been the case with the US Federal Reserve and the Reserve Bank of New Zealand).
Like to know more?
We’d be happy to answer any other questions you might have about the RBA overhaul and what it means for you. Please get in touch and let’s chat.
Comentarios