RBA inflation fight upended as Bullock prepares for major change

By Rachel Clun and Shane Wright

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The Reserve Bank will soon upend three decades of managing the economy a certain way, becoming more precise in fighting inflation just as it goes through the biggest internal upheaval in its 63-year history.

As the hunt begins for the right people to fill three more senior roles at the bank, concerns remain about how it will address a recommendation to target an inflation rate of 2.5 per cent and what that means for the broader economy.

Last week, Treasurer Jim Chalmers revealed deputy governor Michele Bullock as his pick to helm the bank, replacing Philip Lowe in September.

Prime Minister Anthony Albanese and Treasurer Jim Chalmers with incoming RBA governor Michele Bullock last week.Credit: AAP

Bullock, the first female governor in the institution’s history, will have the job of bedding down the key recommendations of the independent review of the RBA, which found the institution and its current board make-up struggled with the increasing complexity of monetary policy settings.

Chalmers, in India earlier this week for the G20 meeting of finance ministers and central bankers, said while Bullock’s main task was to fight inflation, she also had to “reform and renovate” the bank.

“We did the Reserve Bank review to take it forward into the future, and we very deliberately chose Michele Bullock as the person best placed to implement the recommendations,” he told Bloomberg television.

The bank and the government have until the middle of next year to act on most of the 51 recommendations.

While the review backed the retention of the bank’s long-standing 2 to 3 per cent inflation target, it said the new monetary policy committee should aim to get inflation to 2.5 per cent.

Aiming for the midpoint of the range would “maximise the chance that the target is met”, it said, arguing interest rate settings would be markedly different to get inflation to 2 or 3 per cent.

“A range target without a focus on the centre provides a less clear guide to the direction of future policy,” it found.

Monash University academic and former Reserve Bank economist Zac Gross said there were dangers from focusing solely on a 2.5 per cent inflation rate, adding that the target band had served the RBA and the economy quite well over a long period.

“That change could be a bit tricky. If you take it literally, focusing on that 2.5 per cent midpoint means you might go ahead with half a percentage point of extra tightening, with the risks that poses,” he said.

Gross said with Bullock in charge of the bank, it was likely to remain committed to getting inflation in the RBA’s target rather than trying to hit 2.5 per cent exactly.

The exact terminology around the inflation target will be set in the statement on the conduct of monetary policy that Bullock and Chalmers are expected to finalise by the end of the year.

Before then, the appointments of a deputy governor, chief operating officer and assistant governor for economics – all of whom will help implement the reforms – need to be made.

Lowe last week announced some initial changes, including longer but fewer board meetings, each followed by media conferences.

Grattan Institute chief executive Danielle Wood said the changes the bank had already accepted were sensible.

“It’s the power of both more data, more time, more analysis, that makes it a good proposal,” she said.

AMP chief economist Shane Oliver said the changes should lead to more considered decisions but also meant households could expect larger interest rate moves when they happened.

“It does come with a sting in the tail, given that if the RBA wants to get to a particular point, it might have to move by bigger increments,” he said.

Bullock’s promotion opens up the deputy governor role – one that has often been filled by the assistant governor for economics, which will also soon become vacant when Luci Ellis moves to Westpac.

The RBA review also recommended the hiring of a chief operating officer who will in effect run the non-economic side of the bank, sit on its governance board and oversee the institution’s people and workplace culture. Such a person is almost certainly to come from outside the RBA.

This week, Chalmers revealed he would look both here and overseas for Bullock’s deputy, with the aim of having that person in place by September.

“We’ve got an opportunity for renewal in the deputy governor spot and the assistant governor spot at the same time, and I think that’s a good combination,” he told Bloomberg.

Gross said a COO would free up the governor and deputy governor to focus on the economy, while a new deputy and assistant governor were also important steps towards shaping the bank.

“There are two key questions over the deputy – should they be an insider or an outsider, and whether you are appointing a person who will be the next governor, or is this going to be their last rodeo?” he said.

The single largest institutional change is the creation of a new monetary policy board that will set the official cash rate.

Gross said the treasurer and RBA governor needed to start thinking about the make-up of a proposed expert panel that would advise the monetary policy board.

He said Australian experts based overseas could be appointed to the panel, which could act as a type of training ground for prospective RBA board members.

Chalmers and Bullock will also face more turnover in members of both the RBA board and the monetary policy committee, with the review recommending they serve a five-year term with the possibility of a one-year extension.

The bank has had a history of long-term board members. Economist Ian Harper was appointed in 2016 while former members Catherine Tanna, John Akehurst, Roger Corbett and Warwick McKibbin all served a decade with the institution.

Independent economist Saul Eslake said there was still plenty of time for the recommendations to be adopted.

“The only time constraint they need to consider is to give themselves sufficient time to choose the people who will be on that monetary policy committee,” he said.

Since the review, Chalmers has appointed former Fair Work Commission president Iain Ross and experienced non-executive company director Elana Rubin to the RBA board. Ross has already started while Rubin will take up her post from the end of August.

The review recommended that new appointees to the board move to the monetary policy committee once it is in place.

A spokesman for Chalmers said the review’s recommendations had been accepted in principle, suggesting Ross and Rubin would take up positions on the interest rate setting board.

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