It's been a big week for the Reserve Bank, from improving the information flow to the market, investors, home owners ands others about interest rate decisions themselves, the reasons and publishing the minutes of board meetings, to reaching a new agreement with the Government on independence.
The Rudd Government and the Bank yesterday revealed that the positions of Governor and Deputy Governor will be elevated to where they are independent of the administration of the day.
The governor and deputy governor of the RBA have their level of statutory independence raised to be equal to that of the Commissioner of Taxation and the Australian Statistician."
"As such, their appointments will be made by the Governor-General in council, and could be terminated only with the approval of each House of the Parliament in the same session of Parliament," The RBA said in the statement.
That means they will be accountable to Parliament and therefore the representatives of the voters, and not the executive, as are regulators like the head of the ACCC, the competition overseer, or ASIC , the stockmarket watchdog.
Another important development will eliminate the political appointment practised by both sides of Government over the years: from the ACTU Secretary, Bill Kelty, to the discredited South Australian businessman, Rob Gerrard, who had a major dispute with the Taxation Office while on the RBA board.
The statement yesterday said: "The Secretary to the Treasury and the Governor will maintain a register of eminent candidates of the highest integrity from which the Treasurer will make new appointments to the Reserve Bank Board.
"This procedure removes the potential for political considerations in the appointment process and ensures only the best qualified candidates are appointed to the Reserve Bank Board."
The use of the phrase "political considerations' in the RBA statement indicates how upset the conservative central bank has felt with some appointments to the board over the years. It must have been a talking point at the highest levels for years.
It is clear that with Mr Costello, the former Treasurer, responsible for the Gerrard appointment, the bank felt it could not push for a change with the Howard Government, despite three election wins and the chance to redraft the original agreement back in 1996.
The changes form part of an agreement between the RBA and the government on the conduct of monetary policy. The target range for inflation of 2%-3% over the course of the economic cycle was reaffirmed.
That has been the central part of the bank's running of monetary policy in the past 11, nearly 12 years.
"At present the governor and deputy governor operate effectively at the Treasurer's whim," Prime Minister Kevin Rudd said after a cabinet meeting in Brisbane yesterday and the bank said the government recognised the independence of the bank, its responsibility for monetary policy and would respect its as provided by statute.
"The governor takes this opportunity to express his continuing commitment to the inflation objective, consistent with his duties under the act," the RBA said.
The Bank and the Government reaffirmed the central part of the agreement.
"The goals of monetary policy are set out in the Act which requires the Reserve Bank Board to conduct monetary policy in a way that, in the Reserve Bank Board's opinion, will best contribute to:
* The stability of the currency of Australia;
* The maintenance of full employment in Australia; and
* The economic prosperity and welfare of the people of Australia.
"The first two objectives lead to the third, and ultimate, objective of monetary policy and indeed of economic policy as a whole. These objectives allow the Reserve Bank Board to focus on price (currency) stability while taking account of the implications of monetary policy for activity and, therefore, employment in the short term. Price stability is a crucial precondition for sustained growth in economic activity and employment.
"Both the Reserve Bank and the Government agree on the importance of low inflation and low inflation expectations. These assist businesses in making sound investment decisions, underpin the creation of jobs, protect the savings of Australians and preserve the value of the currency.
"In pursuing the goal of medium-term price stability, both the Reserve Bank and the Government agree on the objective of keeping consumer price inflation between 2 and 3 per cent, on average, over the cycle.
"This formulation allows for the natural short-run variation in inflation over the cycle while preserving a clearly identifiable performance benchmark over time.
"Since the adoption of inflation targeting in the early 1990s inflation has averaged around the midpoint of the inflation target band.
"The Governor takes this opportunity to express his continuing commitment to the inflation objective, consistent with his duties under the Act. For its part the Government indicates that it endorses the inflation objective and emphasises the role that disciplined fiscal policy must play in achieving such an outcome."
This means there will be no change in the way interest rates are set and the economy monitored, but the bank will let us now sooner and with far more detail, how decisions were reached.
Not only did the bank reveal a significant change its view on the outlook and inflation, and therefore interest rates for 2008 this week, it did this in the clearest possible way, and signalled its intention to continue doing so in the future.
