Reserve Bank: Shane Oliver warns board shake-up should not stop inflation fight

Stacking the Reserve Bank’s new interest rate board with economists who will be soft on inflation would harm the institution’s credibility, AMP’s Shane Oliver has declared.

Parliament last week green-lit a shake-up to split the Reserve Bank’s leadership into two committees — governance and economic policy — opening the door for a series of fresh faces in charge of the official cash rate.

The new laws followed an eleventh-hour deal between Labor and the Greens that paved the way for dozens of pieces of legislation, and gave Treasurer Jim Chalmers a win on economic reform ahead of next year’s Federal Election.

It also came with a carve-out allowing the treasurer to retain the power to overrule the RBA, a key demand from the minor party during negotiations.

Breaking up the board was a major recommendation of a review into the central bank published last year.

But AMP chief economist Shane Oliver said the changes were “unfortunate”.

“There is no evidence that the RBA Review’s proposal to set up a separate interest rate setting board would lead to better outcomes or that it’s world’s best practice,” Mr Oliver said.

He warned outside economists on the board would be able to outvote the central bank’s internal team and reduce the RBA’s authority.

The RBA may be forced to “defend decisions it did not support”, Mr Oliver said.

“The lack of bi-partisan support for the reform also leaves it weakened,” he said.

“The Coalition is right to be concerned that the Government could stack the interest-rate-setting board with soft-on-inflation economists which would undermine the RBA’s inflation fighting credibility and lead to higher-than-otherwise interest rates in Australia over the long term.”

That’s because dropping rates would push up demand and potentially re-spark inflation, which may force a fresh cycle of tightening policy.

Yet a sign of the Federal Government’s caution came last year, with the appointment of Michele Bullock as governor. Her board has since raised rates and proved reluctant to cut.

Dr Chalmers on Friday said the RBA was being modernised and would keep the institution “world class”.

“This legislation will deliver the biggest set of reforms undertaken at the Reserve Bank in more than three decades,” he said.

Meanwhile, Goldman Sachs said the latest changes would “raise the uncertainty” about the RBA’s strategy going forward — and the investment bank on Friday held strong on its prediction for a February cut.

Royal Bank of Canada chief economist Su-Lin Ong reportedly said the make up of the new board would be a key issue.

“It will likely take some time for markets to assess where on the spectrum of doves/hawks the members sit,” she said.