Over recent decades the economic and financial environment has become more complex. Globalisation has led economies to be more interlinked and financial innovation has raised the complexity of the financial system. Monetary policy itself has also become more complex as, in many countries, interest rates declined until they hit their effective lower bound. Central banks have responded by using new tools such as asset purchases and forward guidance. Broad changes in demographics and inequality have added uncertainty to the future path of interest rates.

The more complex and uncertain environment has tested the RBA and its monetary policy framework. This has underscored some of the strengths of current arrangements. But, in a number of recent episodes, it has highlighted clear opportunities to improve systems and processes.

To be ready to face current and future challenges, Australia needs a clear and robust monetary policy framework, effective decision-making arrangements, and a high performing institution that best supports decision makers. Taking the lessons from recent performance along with evidence gathered from submissions, consultations and engagement with RBA staff, this review makes recommendations grouped into five themes that reinforce each other. Together they will deliver an RBA that is fit for the future.

Recommendations

1. Affirm the RBA’s independence and clarify its statutory monetary policy objectives.
2. Keep a flexible inflation targeting framework but clarify how it operates.
3. Promote a better understanding of the relative roles of fiscal and monetary policy.
4. Institute regular reviews of the monetary policy framework and tools.
5. Legislate the RBA’s financial stability role.
6. Reinforce cooperation arrangements for promoting financial stability.
7. The RBA should take account of climate risks but not use monetary policy to address them.
8. Constitute an expert Monetary Policy Board with diverse perspectives and knowledge.
9. Improve processes to support deeper consideration of monetary policy decisions, strategy and research.
10. Strengthen monetary policy transparency and accountability.
11. Strengthen the RBA’s management, culture and operations.
12. Update RBA oversight and accountability by establishing a Governance Board.