What is the RBA and what does it do?

When the board of the Reserve Bank of Australia (RBA) makes its monthly cash rate announcement, banks and other lenders tend to adjust their own interest rates accordingly. If you’ve seen your home loan repayments jump recently, you may well be wondering how a small group of people in the RBA boardroom can wield so much influence over borrowers and savers, and who holds them accountable. In this article, we’ll explain how the RBA works and who’s calling the shots.

There was once a time when the RBA’s cash rate decisions were not front page news, and the average Aussie may have been hard-pressed to name the chairman of the board, Philip Lowe. All that has changed in recent months, thanks to a series of steep cash rate hikes. The subsequent home loan interest rate rises have seen the cost of some variable rate mortgages rise by hundreds of dollars a month, and led to fears of mortgage stress, with questions arising as to why this is happening now.

Besides the cash rate, the RBA has recently found itself in the spotlight for a different reason when a wide-ranging review of the central bank’s policies and practices – the first of its kind in decades – was announced by the Federal Government last month.

What does the RBA do?

Who sits on the RBA board?

The RBA board comprises nine members, who are tasked with making these important financial decisions. Generally, these people come from finance backgrounds, with some coming from the corporate world, some from universities or government bodies, and some from the world of banking. At the head of the board are three members who hold executive roles – the Governor (who serves as Chair), the Deputy Governor (who serves as Deputy Chair) and the Secretary to the Treasury – and alongside them are six non-executive members. At present, the membership of the RBA board comprises:

• Governor: Philip Lowe – Chair of the Council of Financial Regulators
• Deputy Governor: Michele Bullock – Member of the Bank for International Settlements Committee on Payments and Market Infrastructures (CPMI)
• Secretary to the Treasury: Steven Kennedy PSM – Ex officio member of the Board of Taxation
• Mark Barnaba AM – Deputy Chair and Lead Independent Director of Fortescue Metals Group Ltd
• Wendy Craik AM – Chair of the CSIRO Oceans and Atmosphere Advisory Board
• Ian Harper AO – Dean and Director of the Melbourne Business School Limited
• Carolyn Hewson AO – Non-executive Director of CSL Limited
• Carol Schwartz AO – Founding Chair of the Women’s Leadership Institute Australia
• Alison Watkins AM – Chancellor of the University of Tasmania

Who appoints the RBA board?

The members of the RBA’s board are appointed by the Federal Treasurer. The Governor and Deputy Governor of the RBA board are appointed for terms of up to seven years, and other members are appointed for terms of up to five years. There is no limit on the number of terms that a board member may serve.

Current RBA Governor and Chair Philip Lowe was appointed to the RBA board by then-Treasurer Scott Morrison in 2016. Dr Lowe’s present term at the head of the RBA board is set to end on September 17, 2023. The RBA’s website lists all the members of the bank’s board, when they were appointed and when their terms are due to expire.

Who is Philip Lowe?

Philip Lowe, the current Governor and Chair of the RBA board, has a long history with the bank. A Sydney Morning Herald feature on Dr Lowe’s life and career noted that he was first employed by the bank as a clerical worker in 1980, at the age of 17. He worked at the bank while studying for a commerce degree at the University of NSW (UNSW), and would go on to do a PhD at the Massachusetts Institute of Technology (MIT).

He worked at the Bank for International Settlements in Geneva between 2000 and 2002 as the head of its Financial Institutions and Infrastructure Division. He then returned to the RBA, holding various key research posts before he was eventually made Deputy Governor in 2012, and appointed Governor in 2016.

At the time of Dr Lowe’s appointment, outgoing Governor Glenn Stevens said: “There could be no one better qualified than Phil Lowe to lead the Bank through the next seven years. The bank will be in the very best of hands.”

Who does the RBA board answer to to?

The RBA and its board are accountable to the Parliament of Australia. The Governor and various senior officers of the RBA appear twice a year before the House of Representatives Standing Committee on Economics, to report on the bank’s actions and decisions. At these appearances, the Governor makes an opening statement, which is later published on the RBA website, and this is followed by a question and answer session.

If there is a disagreement and Parliament feels that the RBA board is not fulfilling its duty to make decisions for the good of Australians and our financial system, there are steps that can be taken. First of all, the Federal Treasurer is required to talk things out with the bank’s board, in order to try and come to an agreement. If they are unable to do so, then the board is required to provide the Treasurer with a statement that lays out their position on the matter.

The Treasurer is then required to submit a report to the Governor-General. The Governor-General then goes over this with an advisory group known as the Federal Executive Council, and will have the final say in what the bank is to do. In practice, this Council is made up of the Prime Minister, Treasurer and other cabinet ministers, and the Governor-General acts based on their advice and recommendations. After the Governor-General comes to a decision, the Treasurer will inform the RBA board of this outcome.

In essence, what this means is that if a government is ever unhappy with the RBA’s decisions, then it, rather than the bank, will have the final say.

Why is the RBA raising rates so much?

The COVID-19 pandemic presented a unique challenge to the Australian economy, with major cities going into lockdown and sectors including hospitality and tourism facing major disruption. In response to this, the RBA cut the cash rate three times throughout 2020, with the last cut in November leaving the rate at a record-low level of 0.10%. It adopted this so-called “emergency setting” to stimulate spending in the economy, in hopes of avoiding a recession. At the time, Philip Lowe said that the board was “not expecting to increase the cash rate for at least three years”.

In May 2022, however, the RBA raised the cash rate much earlier than previously predicted, and has continued to raise it every month since. In fact, the bank’s 50 basis point rate hike in June of 2022 was the largest it had made in two decades, and the bank also hiked rates by the same amount in July and August. It did this in response to soaring inflation, which has seen the cost of living increase and the price of everyday goods get higher for Australians.

Many of Australia’s variable rate mortgage-payers, especially those who bought property throughout 2021 on the assumption that they would have at least two years free of rate rises, may have been left feeling that the RBA let them down as they saw their repayments go up.

Speaking with Canstar, Griffith University Professor of Economics Fabrizio Carmignani said he understood the frustration felt by many, but he added that had the RBA not acted, inflation could have risen “exponentially”, putting even greater pressure on households.

In theory, if the RBA raises the cash rate, people will need to spend more money paying off their home loans and will therefore spend less in other parts of the economy, thereby cooling demand and lowering inflation. While the RBA can wield influence over the Australian economy, it’s only part of the picture – after all, it’s the government that decides how much tax we pay and what to spend it on.

In addition, the world faces a number of unique challenges at present, such as global supply chain crises and ongoing conflicts in Europe, which can also affect the price of important goods and are out of the RBA board’s control.

This could mean that, even with the RBA’s recent efforts to curtail inflation, the prices of goods, especially homebuilding materials such as timber, could remain high for some time to come.

Why is the RBA facing a review?

In July of this year, the Federal Government announced a plan to hold a long-discussed review of the RBA, a move that had bipartisan support in Canberra, with both major parties committing to it in the lead-up to the last federal election. This will be the first such review conducted since 1981, more than 40 years ago.

Prior to the official announcement of the review, a panel of 12 leading economists penned an open letter, calling it a “once in a generation opportunity” to review the central bank, and urging that it be both wide-ranging and independent.

Federal Treasurer Jim Chalmers has published the terms of reference for the review, which will be headed up by a panel of three independent experts. The panellists will be:

• Carolyn Wilkins, an external member of the Financial Policy Committee of the Bank of England and former Senior Deputy Governor at the Bank of Canada;
• Professor Renée Fry‑McKibbin, one of Australia’s leading macroeconomists and Interim Director of the Crawford School of Public Policy at the Australian National University; and
• Dr Gordon de Brouwer PSM, an eminent Australian economist and Secretary for Public Sector Reform with 35 years’ experience in public policy and administration in Australia, including at Treasury and the RBA.

The review will consider whether the RBA’s 2% to 3% inflation target, which has not changed since it was first set in 1993, still makes sense in today’s economy. More generally, it will consider how well the bank it meeting its objectives, how it is managed and governed (including the structure of the board and the experience that its members bring), as well as workplace culture, management, and the recruitment process.

The Review will produce a final report and make recommendations to Government by March 2023, six months before the conclusion of Philip Lowe’s current term. It remains to be seen what the review will uncover, and whether this will lead to any significant changes or adjustments at the RBA.

Cover image source: Reserve Bank of Australia