UPDATE: Independent Reserve Bank of Australia review.

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? Find out.

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?

• RBA should have a ‘monetary policy board’ with greater economic expertise & shift to 8 meetings a year (instead of 11) to allow more time to consider issues.
• Hold a press conference after every meeting to encourage transparency and the board members to publicly discuss their work.
• Two separate boards should be established – one for monetary policy, the other for the governance of the RBA.
•  An inflation target of 2-3% should be retained.
• There should be five-yearly reviews of the RBA’s monetary policy framework & 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 decides on 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 deciding.

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? Connect with FinancePath today on 1300 780 440 to discuss any questions you have regarding the RBA overhaul and its implications for you.