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Reserve Bank Independence
Brendan Bailey
and
Ian Ireland
Law and Public Administration Group
While it is an accepted principle in a democracy that it is the prerogative
of the Government of the day to formulate and announce its policies, the
threat of a High Court challenge looms over the proposal by the Treasurer,
Hon Peter Costello, to establish a written compact with the new Governor
of the Reserve Bank on agreed inflation targets.
Those opposed to the proposal see it as an erosion of the independence
of the Reserve Bank guaranteed under the Reserve Bank Act 1959.
Opponents may also see an inflation first policy as inconsistent
with the express statutory functions of the Reserve Bank which include
ensuring that the monetary and banking policy of the Bank is directed
in such a way as will best contribute to:
- stability of the Australian currency
- the maintenance of full employment
- the economic prosperity and welfare of Australians.
Reserve Bank Act 1959 (Australia)
The Board of the Reserve Bank comprises three ex-officio directors,
being the Governor, the Deputy Governor and the Secretary to the Treasury,
and up to seven other directors (of which at least 5 must not be public
servants or officers of the Bank). The Chairperson of the Board is the
Governor. Board meetings require a quorum of 6. Decisions require a majority
vote with the Chair having a deliberative vote and, in the case of equality
of voting, a casting vote.
Parliament has established a procedure for breaking an impasse between
the Board of the Reserve Bank and the Government on questions of policy.
Section 11 of the Reserve Bank Act 1959 stipulates that where
a difference of opinion arises between the Government and the Board, then
the Governor-General acting on the advice of the Executive Council, may
determine the policy to be adopted by the Bank. The Treasurer is required
to table in Parliament a copy of the order determining the policy.
One view of section 11 is that it expresses an intention that the initiation
of monetary policies on such matters as inflation is primarily the province
of the Reserve Bank, which then informs the Government. The wider view
of section 11 is that a policy difference could arise if a Government
informed the Bank of the Government's monetary policy and the Bank, after
consideration, expressed a difference of opinion.
Reserve Bank of New Zealand Act 1989
The Reserve Bank of New Zealand Act 1989 (the NZ Act) has attracted
international attention as a model for formulating and implementing monetary
policy with the economic and predominant objective of achieving and maintaining
stability in the general level of prices. While the NZ Act does not define
the term price stability, it does require the Minister for Finance and
the Governor of the New Zealand Reserve Bank to agree on what price stability
means and to table their agreement in Parliament. This Policy Targets
Agreement also specifies the New Zealand Reserve Bank's future inflation
targets and gives dates by which those targets are to be achieved. The
Governor is held personally responsible for achieving those targets, and
can be dismissed in the event of failure.
There have been two Policy Targets Agreements under the NZ
Act. The current agreement commenced in December 1992. In the recent two
quarters (and expected for the next several quarters), the inflation targets
have been exceeded marginally. The likely peak for inflation is 2.6 %
for the June Quarter 1996. The NZ Government has noted the marginal variation
to the targets but has expressed its continuing confidence in the Governor.
The Debate in Australia
Key questions being debated in Australia in relation to inflation targets
include:
- whether the New Zealand model should be adopted in Australia; and
- if inflation targets were set; what should they be.
Supporters of the setting of an inflation target argue that it provides
a strict and transparent definition of price stability and a robust accountability
mechanism which enables monetary policy performance to be monitored by
the Government and the public.
Opponents of specified inflation targets argue that a fixed target could
bind the Reserve Bank into adopting monetary policies which would have
a negative impact on economic growth and employment levels and question
what is an unacceptably high rate of inflation.
An article in the Australian Financial Review on 14 August
1996,(4) expresses the opinion that the Costello approach (exchange of
letters with the Governor) may invite political pressure to issue subsequent
letters whenever the Government is strongly urged to change the Bank's
inflation targets.
Public Disclosure
At present the Reserve Bank is accountable to the public through publication
of its Annual Report, through various internal checks and balances, but
not otherwise in a formal or public sense.
The New Zealand model which requires the tabling in Parliament of the
Policy Targets Agreements supports the view that the Costello
model of an exchange of letters should also be accompanied by a tabling
requirement.
Viewed overall, there is sufficient ambiguity in what constitutes independence
for the Reserve Bank for appropriate amendments to be made to the
Reserve Bank Act 1959 to formalise this proposed joint target setting
by the Government and the Reserve Bank.
- See Press Release by Hon Kim Beazley, Leader of the Opposition, Labor
to Seek Legal Advice on Costello Bank Letter Plan, Perth, 13 August
1996, and Hull, C 'Threat to bank's independence', The Canberra Times,
14 August 1996.
- Section 10 of the Reserve Bank Act 1959.
- Sections 14, 20 and 21 of the Reserve Bank Act 1959.
- Mitchell, A 'Keep RBA letters vague', Australian Financial Review,
14 August 1996.
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