How might the changes at the Reserve Bank of Australia impact interest rates?

The Reserve Bank of Australia (RBA) has played an outsized role in many Australian homeowners’ finances this past 15 months as it lifted interest rates to tame runaway inflation. That’s after recent Australian Bureau of Statistics data revealed higher mortgage rates had contributed to the largest rise in living costs in decades over the June quarter.

Fortunately, it appears the central bank’s 400 basis points worth of tightening since May is working to cool the economy, with annual inflation falling to 6.0% in the June quarter from the March quarter. As such, many economists think we are at or getting close to the peak of the interest rate cycle, with Westpac chief economist Bill Evans recently predicting the RBA’s next move will be down. Mr Evans forecast that rate cut for the September 2024 quarter.

By then, the way the RBA makes its decisions on the cash rate and subsequently communicates this to the general public will be very different to how it’s done now. That’s because the central bank is undergoing a major shakeup in response to a Treasury review of its operations.

What’s changing?

In a speech at the Economic Society of Australia, outgoing RBA governor Philip Lowe detailed some of the reforms the central bank was undertaking following the review.

These changes will begin in 2024 and include:

  • Fewer monetary policy meetings – with the RBA Board meeting eight times a year, rather than 11 (as is currently the case)
  • Longer monetary policy meetings – with the meetings typically starting on a Monday afternoon and then continuing on a Tuesday morning
  • RBA board members having the opportunity to attend internal staff meetings before the monetary policy meeting, so they can hear directly from, and ask questions of, a broader range of staff
  • The post-meeting statement announcing the decision being issued by the board (not, as is currently the case, the governor)
  • The governor holding a media conference after each board meeting to explain the decision
  • Releasing the quarterly Statement on Monetary Policy at the same time as the outcome of the board meeting (in February, May, August and November), rather than on the following Friday (as is currently the case).

“The less frequent and longer meetings will provide more time for the Board to examine issues in detail and to have deeper discussions on monetary policy strategy, alternative policy options and risks, as well as on communication,” Dr Lowe said. “Likewise, the staff will have more time for analysis, with less time spent preparing summaries of recent developments. The Board will also be able to hear directly from more staff and have greater opportunity to request work on particular topics. And the post-meeting media conferences will provide a timely opportunity to explain the Board’s decisions and to answer questions … Together, this is a significant package of reform that will contribute to better decision-making and communication.”

What might it mean for mortgages?

Fewer meetings will mean fewer interest rate decisions. While that will likely give more time for homeowners to absorb any interest rate rises, it could mean larger moves might be necessary at the meetings, according to AMP deputy chief economist Diana Mousina. “We see that in other countries where they have less frequent meetings, like the US, where they can hike by 50, or 75 basis points in one month,” she said.

The Australian Financial Review also speculated that fewer meetings would mean Australians could expect fewer out-of-cycle rate rises from their lenders.