What you need to know about the RBA review

Today, the Treasurer was handed the final report of the Reserve Bank of Australia (RBA) review. This has been ongoing since 2021 and comes on the back of reviews into the US Federal Reserve and the European Central Bank. If you hadn’t already heard about this review, you might be wondering why a review was announced. Basically, it comes down to two perceived policy mistakes – the first being the failure to get inflation above 2% through 2015 to 2019, and the second being the indication that interest rates would not be raised until 2024.

Most importantly, the RBA’s objective and policy target are not changing. The RBA will continue to target inflation of 2-3% over the medium term and pursue a policy that encourages full employment. There are going to be some semantic changes to the inflation target though. Technically, the current objective is for ‘2-3%, on average, over time’. The recommendation is for the RBA to become more explicit on the timeline that they are aiming to get inflation back within target – it’s important to note that the RBA have recently been doing this already, utilising the staff forecasts to indicate when they expect inflation to revert to target.

Another recommendation of the review has been for the RBA to meet less frequently – specifically, to meet eight times per year (currently the board meets eleven times a year). This would bring the RBA in line with many global peers – for example, the US Federal Reserve meets eight times a year. Whilst there is nothing inherently problematic with more frequent meetings, the intent is the allow the RBA more time to consider the potential policy decisions and analyse where the economy is headed between meetings. These meetings may come with regular press conferences, which again would be consistent with what is observed at other central banks such as the US Federal Reserve and the European Central Bank. 

Finally, there is going to be a new board put in place that will be responsible for monetary policy. Currently, the board consists of the Governor and Assistant Governor of the RBA, the Treasury Secretary and six external members – most of whom have significant industry experience. The review panel were concerned that there was not enough expertise among the external members to be able to challenge the RBA, and the recommendation is to create a new board that takes six external members with expertise in economics, monetary policy and/or labour markets. 

We don’t think this review has a significant impact on monetary policy, especially in the near term. Firstly, these recommendations/changes aren’t to be implemented until next year. Secondly, these recommendations are about adjusting the way policy is conducted, rather than changing the objective of monetary policy.

So, what is the outlook for interest rates in Australia? We continue to think that we have likely seen the peak in interest rates following the April meeting (for more detail, please see our article here). The consumer is slowing, mortgage expenses are rising as fixed rate mortgages roll off, and the labour market is expected to soften through this year. Additionally, in recent communications, Governor Lowe has spent a lot of time talking about supply side issues (rent, electricity, and productivity). Monetary policy is not designed to deal with supply side issues, and so this focus indicates that the RBA are reasonably content with the work they have done on the demand side of the economy. The market currently is priced for one more rate hike by September this year, and the potential for a rate cut by the middle of 2024.

The combination of lower recession probability and a central bank that is likely at the end of its hiking cycle, leads to our view that Australian government bonds and Australian equities look relatively attractive relative to other regions.