Why is Labor trying to reform the RBA and why is Peter Dutton opposing the changes?

<span>The Reserve Bank of Australia governor, Michele Bullock. Labor is locked in a standoff with the Coalition over its attempt to overhaul the RBA.</span><span>Photograph: Bianca de Marchi/AAP</span>
The Reserve Bank of Australia governor, Michele Bullock. Labor is locked in a standoff with the Coalition over its attempt to overhaul the RBA.Photograph: Bianca de Marchi/AAP

The Australian government’s efforts to reform the Reserve Bank and bolster the expertise of those making decisions on interest rates are in limbo after the opposition declared it would block the proposals.

While the government wanted to overhaul the central bank by July, the Coalition has indicated it won’t support the reforms, which it says could let Labor allies take control of interest rates.

Here’s why the changes were proposed – and why they’re stuck in a political standoff.

Why is the government trying to reform the RBA?

The changes aim to update and improve Australia’s central bank in its efforts to use monetary policy, including its control of interest rates, to fight inflation and support employment.

An overhaul was recommended by a major RBA review in 2023, which found the board may have made different interest rate decisions if it had more economic experts and diverse views.

A more expert board could also help in the current cost-of-living crisis by setting the best possible policy for inflation and jobs, according to Jonathan Kearns, chief economist at Challenger and former RBA executive.

“We do need that [interest rate] path to be very well considered, and the additional expertise that a well-informed, credentialed board would bring could be helpful,” he said. “That means that we can deliver the best economic outcomes and ensure that standards of living are as high as possible for Australians.”

What will the RBA reforms do?

The key proposal of the reforms was to split the current board into one specialising in setting monetary policy and another in charge of the RBA’s operations and governance.

The existing and the proposed board would be made up of the RBA governor, Michele Bullock, the deputy governor, the Treasury secretary and six external members appointed by the treasurer. However, the external members on the new board would have to be experts in economic policy, whereas the current six are drawn from Australia’s boardrooms.

The review made other suggestions that have already been adopted, such as the board making interest rate decisions less often and holding more press conferences to communicate its thinking.

More controversial proposals have been dropped after backlash from the Coalition and economists, such as the recommendation to remove the treasurer’s power to overrule the RBA’s decisions. The treasurer, Jim Chalmers, said the government will propose a limited version of that power.

Why is the Coalition opposing the reforms?

The government needs votes from the opposition or the Senate crossbench to pass laws to create the new separate RBA boards.

The Coalition, the RBA and economists support the creation of new boards in principle but the shadow treasurer, Angus Taylor, on Tuesday announced the opposition would vote against the legislation.

Coalition MPs say the government could install political allies on the monetary policy board, pointing to Chalmers’ appointment of two former union officials to the board in 2023. The opposition wanted Chalmers to guarantee that all six current external members, including the four appointed by Coalition governments, would join the new board.

Chalmers on Tuesday said he had accommodated Taylor’s concerns and consulted him on possible appointments to the boards, to demonstrate he would not make political appointments.

But Taylor said Chalmers’ recent claim that higher interest rates were “smashing the economy” had derailed negotiations because it amounted to “unacceptable” criticism of the RBA.

“The Reserve Bank now needs to be able to get on with the job … It needs stability, it needs certainty, and now is not the time to be pursuing these reforms, given what we’ve seen from the government,” he said.

Will the Greens support the RBA reforms?

The government is still negotiating with the opposition to get its reforms through parliament, in the hope of getting bipartisan agreement.

However, Labor could turn to the Greens and Senate crossbenchers to get the bills passed, with Chalmers saying on Tuesday that all options were on the table.

Nick McKim, the Greens’ Treasury spokesman, has said he is willing to negotiate but has demanded Chalmers not only keep his power to override the Reserve Bank board but also use it immediately to cut interest rates.

McKim on Tuesday also called on the government to let the RBA keep its power when boosting the money supply to direct the flow of credit, rather than scrapping the power and leaving it to private banks as recommended by the review.

If all the negotiations fall through, the government could adopt the reforms in spirit without legislation by appointing economic experts to the board in future, according to Kearns.

But economists agree that failure to implement the reforms would be major setback for the bank’s inflation-fighting efforts.

“Almost everyone thinks that’s a good idea … and so, given that agreement, it’s infuriating that they can’t get it done,” said Peter Tulip, chief economist at the Centre for Independent Studies.