Press Conference 20/07/22

20 July 2022

SUBJECT: Reserve Bank review.

The Hon Jim Chalmers MP


SUBJECT: Reserve Bank review.

JIM CHALMERS, TREASURER: Today I announce the first wide-ranging review of the setting of monetary policy and the Reserve Bank since the current arrangements were instituted in the 1990s.

This is an important opportunity to get the ball rolling on the Reserve Bank review that the country desperately needs to make sure that the setting of monetary policy is done most effectively into the future as well.

The Reserve Bank is a crucial economic institution which has served Australia well for more than six decades in its current form. Now, we are facing together a complex combination of very difficult economic conditions in the near term as well as a range of longer-term economic challenges as well. And so this is our opportunity to ensure that the monetary policy framework is the best it can be to make the right calls in the interests of the Australian people and their economy.

Now, this review will consider the RBA’s objectives; mandate; the interaction between monetary, fiscal and macro-prudential policy; its governance, culture, operations and more. And today I am releasing the terms of reference for the review as well.

This is not about revolutionising monetary policy in Australia. it’s about reviewing it and then refining it and reforming it. That’s my objective. And I go into this review with an open mind, a genuinely open mind, about the best combination of institutional arrangements for the Reserve Bank, so that we have the world’s best central bank, relying and adapting and adopting world’s best practice, learning from the past but focused on the future.

I want this to be a forward-looking review all about the best combination of arrangements into the future. I don’t want it to be an exercise in pot shots or second-guessing. I don’t want it to be exclusively focused on a backward-looking, blame-shifting exercise. I want it to genuinely be about how do we have the world’s best central bank into the future and how do we make sure that the institutional and other arrangements are set up as well as they can be to ensure that the right decisions, sometimes difficult decisions, are taken in the future in the interests of Australians and their economy.

Now, I’ve asked a panel of three experts from Australia and overseas to conduct this review. They are independent of the Reserve Bank. They are outside of the Treasury Department. They will lead the review in an independent way, and they will report directly to me as Treasurer and to the Government. And that is deliberate.

I welcome the interest that has been shown from a number of quarters in a review that is genuinely independent, which has an international component and which has absolutely first-class people leading the panel. I am absolutely delighted that we got the panel that we got. They were my first three choices, and I’m very grateful, very appreciative, to them for agreeing to do what will be a pretty challenging task.

So, the three members of the panel are Carolyn Wilkins, who’s an external member of the Financial Policy Committee of the Bank of England but also the former Senior Deputy Governor to the Bank of Canada. We’ve got Professor Renée Fry-McKibbin, who is one of Australia’s leading macroeconomists. She’s the Interim Director of the Crawford School of Public Policy at the ANU, and I’m delighted that Renee could join the panel as well. And then rounding out the three on the panel is Dr Gordon de Brouwer. He, as you know, is an eminent Australian economist, currently Secretary for Public Sector Reform. He’s got 35 years of experience, primarily in economic portfolios, also at the RBA; he’s been a secretary of the department, and I’m absolutely delighted that Gordon could be part of the panel as well. So, Carolyn Wilkins, Renée Fry-McKibbin and Gordon de Brouwer are the three that we’ve asked to undertake this review, and we’re very grateful that they have agreed.

The panel will be supported by a secretariat within Treasury with the capacity to second staff from other parts of our economic institutions. The review will produce a final report with recommendations to government by March 2023. Our earlier thinking was that it would be later in the year. We do understand that that’s a relatively quick review but it still gives the panellists time to consult widely with experts and other interested parties, former members of the board, former governors, academics and others here and around the world. It gives them ample time to do that consultation and to come forward with a considered set of recommendations for the government to take forward in – from March 2023. The terms of reference are on the website and there’ll be an opportunity for people to feed in and make submissions via that channel as well.

Now, before I take your questions, I also wanted to announce an extension of an appointment to the Reserve Bank Board. Mark Barnaba AM has agreed to serve another year on the Reserve Bank Board at my request. Mr Barnaba’s current five-year term as a part-time member on the board is due to expire on the 30th of August this year. We will now extend his term by a year, taking his tenure beyond the finalisation of the review into the RBA that I’ve just announced.

Now, Mark, as many of you know, is a really accomplished business leader, corporate adviser, and non-executive director. He’s been a well-respected and well-regarded valued member of the board since August 2017, and I really wanted to thank Mark for agreeing to serve for another year but also for his – the contribution that he intends to make to some of this thinking that we need to do about the future of the Reserve Bank as well. I know that Mark’s been a great contributor to the discussions of the board. I’m really happy that he’s agreed to serve for another year, and I thank him for being prepared to do that. Over to you.

JOURNALIST: Treasurer, you say that it’s not about blame, but you don’t have a review for no reason. Is the reason for the review beyond the fact that the Reserve got it wrong on inflation and also on interest rates? What else did they stuff up?

CHALMERS: Look, my focus is primarily forward-looking, and I don’t want this to be all about taking pot shots at the Governor or the Board. I don’t want it to be primarily about second-guessing decisions that the Board has taken, particularly in the recent past. Obviously, the history is part of what the review panel will consider. But their focus – certainly my focus – is forward-looking to make sure that we can give the Reserve Bank the best combination of institutional arrangements to help them make the right decisions going forward.

JOURNALIST: Treasurer, the question was whether it goes beyond the fact that the Reserve Bank got it wrong on inflation?

CHALMERS: Yeah, of course, it does.

JOURNALIST: And the cash rate.

CHALMERS: Yeah, of course –

JOURNALIST: What are those things?

CHALMERS: Of course it goes beyond that. I mean, it goes to the Bank’s objectives, its mandate, the interaction between monetary and fiscal policy and macroprudential policy. It goes to its governance, it goes to its culture, its operations. It’s intentionally broad because as you know and as others who’ve followed this closely know, there are a range of issues at play here. You know, the flexible inflation target regime is something that people will want to focus on. The issues around the breadth and depth of experience and expertise on the Reserve Bank Board is something that people will want to have a say about. These are all legitimate areas for the review to consider. It is much broader than an opportunity to review the decisions taken by the Board in the last 12 or 24 months. Chloe.

JOURNALIST: Do you think homeowners trust the Reserve Bank in its current form? And what differences could they see on the other end of it?

CHALMERS: Well, we want to build confidence in the Reserve Bank, and you build confidence in an institution by being prepared to refine it and reform it. And that’s our objective here. Look, we know that a lot of Australians are doing it incredibly tough because the price of essentials like groceries and electricity and for much of the recent past petrol, have been putting extreme pressure on family budgets. And interest rates mean that families have to find, and households have to find more in their household budget to service their mortgage at the same time as they’re trying to meet these other cost of living pressures.

So, interest rate rises hurt. And we understand that, and we want to make sure that when difficult decisions are taken by the independent Reserve Bank that they’re based on the best possible processes and the best possible arrangements. That’s what the review is about.

We might go Ron, then Chris then over here.

JOURNALIST: Can I ask, you expect the RBA to bring the review down in March next year, or to hand that to you. What kind of time frame after that? If it makes recommendations about changes to monetary policy, inflation targeting forward, how long do you think you’ll take to implement those?

CHALMERS: Yeah, well, it depends on the recommendations. So, the timing of being able to act on the recommendations depends on the nature of the recommendations, whether there’s a parliamentary aspect to it, whether it requires a different kind of thinking about the appointments and reappointments that are available to government in the course of 2023. It depends on what the panel comes forward with.

But why I’ve chosen to go at the nearer end of a reporting date is because I think it’s possible to do all this work in that time frame, but we do also have some decisions to make next year about the composition of the Board. And the best way to factor that in is to make sure - whether it’s recognising there’s an appointment in May, recognising there’s now an appointment in August is to make sure that we’ve got the best thinking before us when we make those kinds of important decisions. Chris and then there.

JOURNALIST: Treasurer, the Reserve is now saying that it believes households are well placed to deal with the rising interest rates. Do you think – do you share that confidence, given they might be three percentage points higher at the end of the year than they were at the beginning of the year, on top of all other costs? How concerned are you about households?

CHALMERS: I think Australians are finding it difficult to make room in their household budgets for rising interest rates at the same time as the costs of other essentials have been going through the roof. And these interest rate rises will sting because every dollar that a household spends on servicing their mortgage is a dollar that they can’t speed meeting some of the other sky-rocketing costs of essentials.

The point that the Reserve Bank Deputy Governor was making is that a number of people, thankfully, have some room in their mortgage. They’ve been able to build up a buffer, and the banks tell us that that is the case for some Australians. But the point that I would make about that is that not everybody has a buffer, particularly in the teeth of this cost-of-living crisis. And so, we need to recognise that as well.

You know, nobody pretends that interest rate rises are easy decisions to make. They do have a big impact on household budgets, and these sorts of decisions shouldn’t be taken lightly.

JOURNALIST: Thanks, Treasurer. You talk about the relationship between monetary and fiscal policy being an aspect of this review. What are you hoping to learn about that relationship? And, more broadly, is it your view that one has been getting it more right in recent times than other?

CHALMERS: Well, to be fair to central banks around the world, this is a very different type of inflation challenge. You know, we do have strong demand which is part of the story and rising interest rates are designed to take some of the sting out of that demand side pressure. But we’ve got a lot of supply-side pressures as well. If you think about choked-off supply chains, you think about energy and food insecurity, you think about labour shortages, all of these issues on the supply side are making our inflation challenge harder.

And so the job for governments, the responsibility that I accept in the Budget, before that and after that, is to try and deal with some of these supply-side issues. And the economic plan that Katy Gallagher and I released is geared precisely at these sets of challenges. It’s about training more Australians. It’s about cleaner and cheaper energy. It’s about childcare reforms so we can get people back to work if they want to do that. It’s about investing in infrastructure, particularly digital infrastructure. It’s about the sorts of industries which will give us those good well-paid jobs into the future.

All of that is on the supply side. And that’s our job. And so to be fair to central banks around the world and in Australia, you know, they are dealing with part of this challenge but they can’t deal with the whole challenge just by jacking up interest rates. And that’s why we do accept responsibility for doing what we can, influencing what we can influence, particularly when it comes to those supply chains, to make sure not just that we aren’t adding to inflationary pressures but we’re doing our bit to take some of the sting out of them as well.

We’ll go here and then Shane and then John and then Phil.

JOURNALIST: Will a loss of confidence in the RBA impact the economy through different borrowing trends into the future? And how are the RBA’s failed predictions going to impact predictions in the federal budget?

CHALMERS: Well, I’d like to build confidence in the Reserve Bank. And that’s my task. It is to use this review to make sure that they have the best combination of institutional arrangements to make monetary policy decisions into the future. So, I think there is an opportunity here to build confidence in the bank going forward.

Individual Australians will make their own choices about their own financial circumstances based on the information that they have available to them. One of the reasons why I’ve tried to be particularly upfront, particularly blunt perhaps, about our economic situation is because I want people to understand what we’re going through. And we’re going through a time where we’ve got high and rising inflation, falling real wages, we’ve got energy and food insecurity, and our choices are constrained by a Budget which is heaving with a trillion dollars in Liberal Party debt. And I’ve just been upfront about that.

And so, what all of that means for the Budget is the bBdget will be about implementing our election commitments, some cost-of-living relief in areas like child care and medicines, but also trying to wind back this legacy of rorts and waste that we’ve inherited from our predecessors. And part of all of that, sitting over the top of all of that, is trying to make sure that we can make our economy as resilient as the Australian people have proven themselves again and again to be.

And part of that resilience – to go back to the question before – is to make sure that we’re investing in making our supply chains more resilient, because this isn’t just a demand problem; it’s a supply problem as well, and government has got a role to play there, and we’ll play that role in the budget.

JOURNALIST: Treasurer, you mentioned how short, relatively short, the review period is. The Fed’s review took more than 12 months. The ECB’s review took far longer than that. I’m just wondering, given, say, the ECB has ended up saying we have to start thinking about climate change in our decisions and they’re thinking we might have to take in house prices into inflation, is there room to extend the review, and why did you not think that the first review of the RBA in 40 years would require more than six months?

CHALMERS: Well, first of all, I’m not going to contemplate extending the review on the day I’ve announced it. I have confidence in the panel that they can do the necessary thinking and the consultation in the time that we’ve made available to them. I’ve spoken specifically to – and the Treasury has – to the three members of the panel about the time frame that we’re giving them. They haven’t raised any concerns. The Governor has not raised any concerns about the time frame. I think we can do it. And I think that they will do it. So, I’m not contemplating some kind of extension.

When it comes to some of those other issues you’ve raised around housing and around climate change, what I’ve tried to do with the terms of reference is to write them sufficiently broad that if people want to raise those kinds of issues they can. But I’ve also been conscious – I think as I told you on Monday from this lectern – about making sure that the terms of reference can be broadly supported in the parliament as well.

And I had a good conversation with Angus Taylor yesterday about the terms of reference and about the panel and about the extension of Mark Barnaba. And my intention, if it’s possible, if we can do it, is for this to be relatively bipartisan. And what that means is making sure that the terms of reference are uncontroversial without limiting people’s input.

I think I said John then Phil.

JOURNALIST: Thanks, Treasurer. And without pre-empting the review’s findings in any way, the inflation targeting framework does figure fairly prominently in the terms of reference. Is that just including – is including that just a matter of good practice and par for the course if you have a review like this and for people in the financial markets, or is it an active consideration of government that the inflation target could be changed, and you might target something different and include things like climate or housing or nominal GDP?

CHALMERS: Well, let’s see what the review recommends. You know, and I don’t want to unnecessarily limit the panel’s considerations. So that’s really my motivation there. My personal view is that I haven’t yet had proposed to me a version of an inflation targeting regime which is better than the one that we have, but I’ve got an open mind to that changing, to that – I’ve got an open mind to other perspectives on that. And I think it’s important that we give the panellists and the review team the capacity to look at that properly.

You know, if you think about the interest that’s been shown – and you follow the commentators and the academics and the experts on this as closely as anyone – this is probably the main thing that people have been focused on – our inflation targeting regime, the fact that it's flexible. So, I suspect that it will be a big part of conversations. Phil.

JOURNALIST: Treasurer, on the supply side issue, talking about the things the government can do. Your colleague Clare O’Neil sort of put immigration on the heap today. Do you think it’s – I know it’s going to be discussed at the jobs summit but – do you think –

CHALMERS: Is there a story around about this today, Phil?

JOURNALIST: But, you know, it’s a big issue out there for the business community and so forth. Do you think it’s inevitable you’re going to have to increase the migration intake at least on a temporary basis to reverse the backlog? And what will be had trade-off, do you think, with the trade union movement?

CHALMERS: Well, first of all, I mean, I pay tribute to Clare. I mean, Clare O’Neil has only had that portfolio for a short time and one of her highest priorities has been how do we deal with this massive backlog in the visa system in a way that serves some of our economic objectives. Businesses in this country are crying out for workers. It’s one of the things that’s really holding the economy back – the fact that we’ve got labour shortages, skills shortages and issues around labour mobility issues. And so those 60,000 or so applications for permanent skilled visas are Clare’s focus. And I think that’s appropriate. And I think that the business community in particular will welcome her efforts. And so I say that first about that.

In terms of the broader migration settings, I see this as a key conversation at the Jobs Summit, the Jobs and Skills Summit, in September. I think obviously migration is part of the story but it’s not the whole story. And we need to caution against thinking that migration can be a substitute for some of the other things that we need to do to build a bigger, more productive, better skilled high-wage workforce in this country.

You know, we need to get childcare right so people can – new parents can return to work if they want to, earn more, work more. You know, we need to get skills and training right. I think Brendan O’Connor is meeting with the skills ministers either yesterday or today – today – about these issues. Thanks, Ron. And so we need to see this – all of these issues together. Migration is part of the story but not the whole story, and it’s not a substitute for doing the other bits that we need to do. But focusing on the skilled workers that the economy is crying out for in that long queue of visa applicants I think is a very smart, very wise thing to do. Ron.

JOURNALIST: Treasurer, I’ve asked your office about this a couple of times. The Parliamentary Budget Office is under the impression that Labor is still maintaining the 22.9 per cent tax cap of GDP as part of its policy suite. Can I just clarify: is that the case?

CHALMERS: Well, what we’ve said is that there is no need to either refine or ditch or keep the current tax cap given it’s not being hit in the foreseeable future. It’s only been hit four times I think from memory, all by conservative coalition governments. And so, we haven’t provided any guidance to the PBO about that cap. I think I've – at some risk during the election campaign, I think perhaps in an answer to Phil I made my views pretty clear about that tax cap. I think it’s arbitrary. I think the former government pulled it out of thin air. And I don’t see a need for it to be a central part of a fiscal strategy right now when none of the set of numbers that either party took to the election would go near the cap that’s being talked about.

So I haven’t spoken to the PBO about it. But Katy Gallagher is primarily responsible for engaging with the PBO and so I haven’t seen what you’re referring to. But I think I’ve made my views on the tax cap pretty well known. Eliza. We’ll go to Eliza and then you.

JOURNALIST: Treasurer, some mortgage holders may have gotten ahead on their repayments during the pandemic, but those buffers could disappear in the coming months with rising inflation and interest rates. Do you have any idea how many people could find themselves behind on repayments or in arears?

CHALMERS: Look, I’ve been consulting with the banks on that because while it’s true that some people have been able to build a buffer, not everybody has. And as interest rates rise clearly that puts more people into a concerning financial situation. And so, I speak really regularly with the heads of the banks, and not just the major banks. I spoke with one last night and we are monitoring that situation. There has – some people have had a buffer, but that will begin to erode as interest rates get higher.

And the Reserve Bank has made it pretty clear – and the private banks are expecting this, too – that Australians need to brace for more interest rate rises. We’ve got this inflation problem that’s going to get worse before it gets better, but it will get better. It will moderate next year.

And one of the things that I want to do in the Ministerial Statement that I’ll deliver next Thursday, the 28th, in the Parliament, is to talk about the things we’ve got working for us – so that low unemployment rate, for example – but also the things that are working against us. And I think the most confronting aspect of that Ministerial Statement will be our expectations for inflation and also the impact of rising interest rates on economic growth.

JOURNALIST: Treasurer, you just mentioned that it will take til next year with inflationary pressures and rate rises. When can Australians expect their wages to outstrip the cost of living, and does that mean that they’ll have to wait at least another year to 18 months before they start to see real growth?

CHALMERS: Yeah, well, there’s two parts to that. Obviously, the calculation of real wages is about the relationship between inflation and wages growth. We’ve had stagnant wages in this country for the best part of a decade. And a lot of our policy agenda is about trying to get wages moving again as well as – at the same time as we make efforts on the supply side to take some of the sting out of this inflation. And so, when those two things cross over remains to be seen.

We certainly expect the real wage situation to be better next year than this year. How much better depends on our capacity to get that stagnant – those stagnant wages moving again. And so much of what we’ve been on about in the two months we’ve been in office – whether it’s the minimum wage rise or whether it’s some of the indications we’ve given around workers in the care economy, whether it’s our plan around skills and childcare and clean energy and a future made in Australia and the digital economy – all of these areas is about getting wages growing sufficiently.

We will have a better sense next year of when – of what the real wage situation looks like. But I think everybody, every credible forecaster and economic commentator expects things to be difficult in the near term.

JOURNALIST: Treasurer, just finally, on Mark Barnaba’s reappointment for 12 months, there will be a number of appointments that come up between now and the next election. Are there views that you think are currently not represented on that board? One criticism has been perhaps that it might be too business heavy, that it would benefit from more academic views or union views. Are there perspectives that you think are missing that need to be represented there?

CHALMERS: Well, I’ve asked the review to look at that specifically. The review will partly be about the breadth and depth of experience and expertise on the Reserve Bank Board. And I think that’s one of the most important things that the review can look at. There are different models around the world. You can’t have everybody on it. It’s a relatively exclusive board in the sense that it’s not big, and so you’ve got to make trade-offs. And there’s views about academics, there’s views about representatives of workers. There’s views around the best mix of business input. And we’ve got a genuinely open mind to what the panel might recommend about that.

When it comes to the appointments that are coming up, I think with the decision that I’ve taken with Mark’s agreement to extend him for 12 months means that there’ll be two board appointments after the review hands its report down but before the next election. And Governor Lowe is up, of course, in September of next year, and so the Government will come to a considered view about that as well. But I hope to be able to take the recommendations of the review panel into account when we make those appointments.

Thanks very much.