By Alasdair Pal
SYDNEY (Reuters) - Australia on Thursday released its review of the Reserve Bank of Australia, the first external review of the central bank and the operation of monetary policy in four decades. The report made 51 recommendations, including moving to a clearer monetary policy framework and greater accountability.
Here are the key recommendations of the report:
CLEARLY DEFINED OBJECTIVES
"The RBA’s objectives for monetary policy should be clarified as a dual mandate to contribute to price stability and full employment ... Together they require the RBA to strike a balance between controlling inflation and supporting employment, in both the short and longer term."
CLARIFY INFLATION TARGETING
"The current wording of the inflation target is that inflation should be between 2 and 3 per cent ‘on average, over time’. The reference to ‘on average, over time’ makes it harder to say whether or not the target is being met, limiting accountability, and should be dropped. Instead, the RBA should be required to explain how it is using its flexibility. This should include how quickly it is aiming to return inflation to around the midpoint of the target, its assessment of full employment, and how, if at all, financial vulnerabilities or other considerations have factored into its decision."
PROMOTE BETTER UNDERSTANDING
"There should be increased information sharing between the RBA and Government on risks, scenarios and policy constraints. As part of this, the RBA and Treasury should undertake joint scenario analysis exercises to prepare for challenging circumstances."
REGULAR REVIEWS
"To ensure that the RBA’s approach to monetary policy remains appropriate in a changing economic environment, the Review recommends 5-yearly reviews of the monetary policy framework and tools."
LEGISLATE FINANCIAL STABILITY ROLE
"The Review seeks a firmer foundation for the RBA’s financial stability role and clarification of the scope of its responsibilities. The complex risks, overlapping responsibilities and distributed tools for financial stability demand clear accountability for the use of tools, and close cooperation between regulators."
ADDRESS CLIMATE RISKS
"The RBA should continue its work to understand the implications of climate change for the economy and the financial system, taking further steps to incorporate physical and transition risks into RBA analysis and modelling."
RECONSTITUTE MONETARY POLICY BOARD
"Monetary policy should be set by a dedicated Monetary Policy Board whose members bring an independent and informed perspective on monetary policy and are able to robustly challenge the views of others. Members should be able to make a significant contribution to decisions through expertise in areas such as open-economy macroeconomics, the financial system, labour markets, or the supply side of the economy, and in the context of decision making under uncertainty."
IMPROVE PROCESSES
"The RBA and Monetary Policy Board should make changes to deepen the Board’s deliberation on monetary policy and ensure it is open to a wide range of inputs. These include: moving to fewer policy meetings but increasing the time spent on monetary policy and strategy (and) providing opportunities for Board members to hear the views of a wider range of RBA staff and giving external Monetary Policy Board members staff support."
STRENGTHEN TRANSPARENCY
"Monetary Policy Board members should be more accountable for their role in setting monetary policy. They should be expected to discuss the Board’s decisions in public from time to time, and statements released after policy meetings should be agreed by them and published in their name."
ESTABLISH GOVERNANCE BOARD
"A Governance Board should be established to provide guidance and oversight for RBA management in the running of the organisation. In line with corporate governance best practice, it should comprise a majority of non-executive members, appointed via a transparent process, and should have a non-executive Chair. There must be a clear division of responsibilities within the RBA between the Governance Board, Monetary Policy Board and Payments System Board."