Governor Lowe’s response to the RBA review

Plus, Orphanides on ‘Monetary Policy with Near Zero Policy Rates’

RBA Governor Philip Lowe has announced a raft of changes to the processes around Board meetings and monetary policy announcements, as well as the internal management of the Bank. Other prospective changes have been deferred pending forthcoming changes to the RBA Act. Lowe’s announcement at the Economic Society of Australia annual conference comes ahead of the government’s imminent announcement of a new RBA Governor to replace Lowe when his term expires in September.

The changes that will most concern financial market participants relate to the timing of monetary policy announcements. From next year, the Board will meet eight times a year, rather than 11. Four of the meetings will be on the first Tuesday of February, May, August and November. The other four meetings will be held midway between these meetings. The exact dates for 2024 will be published soon and the dates for future years will also be published in advance. As a number of market participants have already flagged, this will make pricing of short-term interest rates more difficult until these key dates are known.

The Governor will hold a media conference after each Board meeting to explain the decision. The media conference is expected to be held at 3.30 pm following the 2:30pm announcement window. During and following the pandemic, the RBA would hold post-meeting press conferences on an ad hoc basis following major decisions, but the RBA Review recommended the Bank should follow overseas practice to holding press conferences after every meeting.

These changes are all positive developments from a process, transparency and accountability perspective. But more important reforms are still to come, including a new Statement on the Conduct of Monetary Policy between the Treasurer and the Board to be put in place before the end of the year and changes to the RBA Act expected before 1 July 2024.

Reviewing the RBA Review papers: Orphanides on ‘Monetary Policy with Near Zero Policy Rates’

This is the second installment in my review of the RBA Review papers, this time ‘Monetary Policy with Near Zero Policy Rates: A review of the Australian experience’ by Athanasios Orphanides.

Orphanides makes a number of good recommendations, some of which clearly informed the final report’s recommendation that the RBA focus more squarely on the mid-point of its existing 2-3% target range. But his evaluation of the RBA’s use of alternative policy instruments draws the wrong conclusions and helps explain why the RBA review’s findings on pandemic-era monetary policy are not as robust as they could be.

I will start with what I think Orphanides gets right. He is suitably critical of pre-pandemic monetary policy. He notes the imperfect anchoring of inflation expectations, that realised inflation rates were too low and that this meant that the zero lower bound became more of a binding constraint during the pandemic.

Orphanides attributes these short-comings to ‘meeting-by-meeting discretionary decision-making’ rather than a more systematic, rules-based approach. Orphanides concludes that if inflation expectations had been ‘better anchored at 2.5%, the RBA would have faced less pronounced disinflationary risks in 2020 and an easier task to counteract the inflation spike in 2022.’ This conclusion no doubt helped inform the Review panel’s recommendation in favour of a stronger focus on the mid-point of the target range.