Are external RBA Board members conflicted?

The RBA once argued as much

A footnote to the minutes of the May RBA Board meeting noted that three of the external Board members did not participate in the decision to extend collateral eligibility to corporate bonds due to the potential for a perceived conflict of interest. This was the right thing to do in the circumstances and consistent with provisions in the Reserve Bank Act designed to handle such conflicts. These provisions also preclude officers of ADIs from eligibility for appointment to the Board.

While these provisions address specific conflicts of interest, the external Board members arguably face a more general potential conflict in making decisions about monetary policy. This potential conflict is implied by the suppression of the contributions of individual Board members in the minutes.

In the bad old days when the RBA spent hundreds of thousands of dollars at the Administrative Appeals Tribunal trying to prevent the release of the Board minutes under Freedom of Information legislation, it argued explicitly in affidavits before the Tribunal that releasing the minutes would potentially expose external Board members to pressure from the constituencies from which they are drawn. As recently as 2004, the RBA used powers helpfully given to it by then Treasurer Peter Costello to issue a “conclusive certificate” to prevent publication of the minutes, declaring their release not in the public interest.

We have come along way since then. Glenn Stevens saw the writing on the wall when the ALP won office in 2007 and decided shortly after the election to release the Board minutes in the form in which we now know them. The RBA also maintains that identifying the contributions of individual Board members would be inconsistent with the Board’s consensus approach to decision-making.

The real problem is not that the external members are conflicted, but that their contributions to the Board’s deliberations are deemed to be inconsistent with greater transparency.

A better approach would be to professionalise monetary policy decision-making by creating a separate monetary policy committee consisting of RBA executives and full-time external appointees with economic and monetary policy expertise whose contributions to the committee’s deliberations could be fully disclosed and the consensus approach to monetary policy decision-making, which is so vulnerable to groupthink, abandoned.

Sir Paul Tucker has suggested the optimal size for a MPC is seven members. Five members is too vulnerable to groupthink. Nine members is too unwieldly. The seven could consist of three RBA executives and four external members, ensuring the RBA would need the support of at least one external member for its position. In principle, however, there is no reason why the RBA executives should be required to vote in the same way, allowing for much needed dissent within the Bank itself.

The Reserve Bank Act empowers the Board ‘to determine the policy of the Bank in relation to any matter.’ In practice, this means the Board’s main function is to set monetary policy, but the part-time external Board members are for the most part not chosen for their monetary policy or economic expertise.

If monetary policy is to be made by a specialist committee, what role would that leave for the Board? The obvious answer is governance and oversight, a function the current Board is not set up to perform, not least because it would be put in the position of oversighting its own decision-making in relation to monetary policy. The non-executive Board members should be given the job of oversighting whether monetary policy is being conducted in a way consistent with the RBA’a statute and any policy agreement with the government. An extension of that oversight responsibility could be the power to recommend to the Treasurer the dismissal of the Governor for non-performance against a better defined mandate. This would be a powerful accountability mechanism that is currently entirely lacking. It should go without saying that such a mechanism should rarely, if ever, be used. Its existence should be sufficient to prevent that outcome, just as the existing over-ride provisions for resolving conflict with the government have never been invoked. As things stand, oversight is limited to a twice-yearly appearance before a Parliamentary committee.

Arguing that only professional economists should make monetary policy decisions no doubt sounds self-serving coming from an economist, but the aim is not just to substitute the judgements of economists for the current non-economist external Board members. The hope (possibly misplaced) would be that these economists would set policy based on market signals. That is the essence behind Scott Sumner’s proposal for nominal GDP futures targeting. The job of a monetary policy committee should be to operationalise that approach.

This week sees the release of March quarter construction work done and private new capital expenditure, with the market expecting declines in both. Investment was already weak going into the pandemic and can be expected to collapse in the second quarter.


Some of my former UNSW colleagues discuss how the pandemic will see the CPI underestimate changes in the cost of living and overstate after-inflation consumption growth.

The Wisdom of Jerome Powell

Phil Lowe says we won’t go there, but the banks are preparing for negative rates. Negative rates are under active consideration by the RBNZ and the BOE, while UK 3-year gilt yields have turned negative.

In case you didn’t know, negative rates are a free market phenomenon.

A Tale of Two Talebs or, how to kick your addiction to the Internet’s biggest asshole.