RBA board isn’t meek, says governor Philip Lowe

The governor of the Reserve Bank of Australia (RBA), Dr Philip Lowe, has acknowledged the conclusions of the review into the central bank, An RBA fit for the future, but disputed some of its painting of how the board currently operates.

While Mr Lowe welcomed the panel’s “excellent work” and overall conclusions — which he said would “help us deal with this more complex world and will strengthen the monetary policy process and governance of the RBA” — he said some of the discussions in the report didn’t “resonate” with him.

This mainly centred on the painting of a board that doesn’t challenge the RBA executive’s decisions on monetary policy.

The report read: “The Review’s assessment is that current processes do not sufficiently support Reserve Bank Board members to effectively challenge and develop their own independent views and contribute to discussion at the Board. Reserve Bank board members do not have adequate time, resources or information to challenge the RBA executive’s view. By and large, Reserve Bank Board members do not have access to staff below Assistant Governor level or attend internal policy deliberations or briefings ahead of their decision. Papers are received on the Friday before the Tuesday Board meeting.

“Board members were complimentary of the quality of the papers they receive and of the RBA’s responsiveness to questions they ask at the time. However, the Review observed that current papers are limited in their discussion of policy considerations and alternate views, and the current schedule significantly limits the board’s time to question or probe perspectives presented in the papers. In addition, there are examples of the Board not receiving nor requesting sufficient information to challenge the RBA executive’s view.”

Many consulted by the review were found to be concerned that the Reserve Bank board as currently set up could therefore only provide only limited challenge to the view of the RBA executive. 

“The Reserve Bank board has not voted against a recommendation of the RBA executive in at least the last decade,” the review continued.

“Current processes create a situation in which the governor, deputy governor and treasury secretary have much more information than external board members. This, together with the expertise imbalance, reduces the ability of external board members to have a comparable influence on the decision.”

The reviewers outlined that both current and former Reserve Bank board members themselves described the Reserve Bank board’s role in various ways, ranging from “providing real-time feedback on the economy, to an informed second opinion, to a ‘pub test’ of how decisions might be understood by the public”. 

“These explanations centred on the external members providing a non-expert challenge to the RBA executive’s proposed monetary policy approach,” the reviewers outlined.

“That leaves the underlying economic and financial judgements with insufficient external scrutiny or challenge and represents a missed opportunity.

“Currently, the Reserve Bank Board provides only limited challenge to the RBA executive’s view and its skill set is not matched to the complex and uncertain economic environment in which monetary policy will increasingly operate.”

It therefore recommended that the RBA should move away from having one board that oversees everything to one that sets monetary policy and the cash rate and another that oversees the bank’s governance and management (including HR, technology, and risk management). This would reduce the concentration of power when it comes to central bank decisions and improve governance.

The review suggested that the monetary policy board should comprise the governor, deputy governor, treasury secretary, and six external members.

Noting the “major change” recommended by the panel to establish separate boards for monetary policy and the governance of the bank (which requires legislative changes to the Reserve Bank Act), Mr Lowe commented: “I have thought for some time that there was a strong case to strengthen the governance of the RBA as an institution. 

“The RBA is responsible for many nationally important functions in addition to monetary policy. These include being the banker to the government, the operator of critically important payments infrastructure, the printer of banknotes and passports, and the manager of Australia’s foreign exchange reserves. So there is a lot more than just monetary policy…

“As you know, there is great deal of public visibility of, and commentary about, our monetary policy decisions, but there is much less oversight of how I discharge my responsibilities to manage the RBA. 

“From a number of perspectives, current oversight arrangements fall short of contemporary standards. The proposed changes would address this and help the Governor manage the Bank and its many functions.”

Is 11 press briefings too many?

Mr Lowe also welcomed the recommendation that the new monetary policy board should include people with “diverse perspectives and knowledge” and who have experience in decision-making under uncertainty.

However, he told members of the media that while he thought the review process was excellent, he added: “The review panel did not sit in the boardroom and the description of how the board process works and the challenge in the boardroom that the panel has, doesn’t particularly resonate with me.

“In the boardroom right next door, what I see are nine people who are deeply engaged in the questions, they bring a great deal of expertise to the issues that we’re dealing with, they’re probing, they challenge me and sometimes I speak last in the meeting.

“So the idea that the board members sit there meekly and accept the recommendation that I put to them is very far from the reality that that I’ve lived as the governor. That part of the review discussion didn’t really resonate with me.

“I’ve defended the process in the past. We’ve got nine people making those decisions, they do it very diligently and have expertise. It’s not to say we couldn’t have a different structure that would help, but I’ve defended the board in the past because I think it has worked very effectively and people take the jobs incredibly seriously.”

Touching on the recommendation that the monetary policy board should only meet eight times a year, rather than 11, he said the board would “consider these issues over coming meetings” and will publish a detailed response later this year after the necessary work has been completed.

He intimated, however, that if the board would need to debrief the press after each meeting, 11 meetings could be overkill.

The RBA governor elaborated: “I’ve valued meeting 11 times a year … But the other consideration that feeds into here is communication because if we were to have 11 meetings a year, and I did a press conference after every meeting, plus five appearances before Parliament, plus speeches in public gatherings, I think we would be in the world of too much communication. So we’ve got to get the right balance here. 

“But it works in other countries … other central banks around the world meet eight times a year and they seem to manage...

“It could work here and the board’s going to have discussion in upcoming meetings about whether it wants to move away from the first Tuesday of every month except for January … so, you might have to get used to a different rhythm.

“To conclude, I would like to again thank the Review Panel for their work. It is not often that central banks are reviewed, so it is important the job is done well and thoughtfully, and that the process is constructive. This is exactly what has been done here.”

[Related: RBA to have 2 boards as part of major shake-up]