Monthly RBA meetings make no sense
The Reserve Bank should meet no more than eight times a year in order to make informed decisions on interest rates.
There are many reasons for this, not least that it would give the bank the opportunity to act on hard data, in contrast to its position this week when it cut interest rates by just 25 basis points without knowledge of the national accounts and jobs data.
As exciting, interesting and enlightening each of the board meetings are for those of us watching and anticipating monetary policy changes, the current timetable for Reserve Bank meetings means that there is an almost unbroken, high profile, often erroneous running commentary on interest rates. No other country seems to have such an interest rate and monetary policy obsession. It’s almost unhealthy how much attention is placed on the bank's interest rate decisions each month when most of those decisions are to keep rates steady (around 70 per cent of board meetings end with interest rates on hold). And when interest rates are adjusted from time to time, the moves are usually well anticipated by the market.
My proposed eight board meetings each year could be slated in for the Wednesday following the release of each quarterly consumer price index and each quarterly national accounts. This would spread the meetings and decisions on interest rates smoothly throughout the year. While no single CPI or national accounts release will drive medium-term monetary policy settings, the growth and inflation results are nonetheless important factors when working out how the economy is going, which means the news from these releases will feed into Reserve Bank deliberations.
A classic case of why the new timetable might work better could show up today. The Reserve Bank cut interest rates by 25 basis points on Tuesday. It did so without knowledge of yesterday's September quarter national accounts and today’s labour force data.
Had it met next Wednesday, as opposed to this Tuesday, it would be making its decision with full knowledge of the soft GDP result and whatever the job number throws up today. If it happens to be a weak jobs result with, say, zero employment growth and the unemployment rate at 5.5 per cent, it might well have chosen to cut 50 basis points to 2.75 per cent rather than 25 basis points.
Under the current timetable it does not meet again for nine long weeks, during which time the economy will be dealing with monetary policy settings that are too tight.
The 27 per cent cut in the number of board meetings each year would have few procedural consequences. The release of Reserve Bank board meeting minutes would be unchanged, other than to meet the requirement of there being fewer meetings. The quarterly statement on monetary policy could be maintained on something very close to the current timetable and the biannual appearance of senior Reserve Bank officials before the House of Representatives Economics Committee would also be unaffected.
There would also be efficiency and productivity savings for the bank. Apart from cuts to travel costs for board members, staff would have to prepare fewer board papers, so freeing up resources for other research projects. There may even be a headcount saving if the bank wanted to lower its cost base.
For financial markets, the various market instruments that price in anticipated changes in the official cash rate would be unaffected. The new dates for Reserve Bank meetings would be plugged into the spreadsheets and market pricing for futures and overnight index swaps would be adjusted accordingly.
The new scheduling would help the bank deal with the Melbourne Cup Day problem, where the monetary policy decision on that day each year competes with the race that stops the nation. It is best to avoid that clash.
Of course the Reserve Bank would maintain its ability to meet and adjust rates in emergency or adverse circumstances outside the timetable of regular meetings, so nothing would change on this score.
The bottom line to the change would simply be that interest rate announcements would occur every six and a half weeks rather than the current four and a half week timeframe. The intense and seemingly unbroken commentary – the "will they, won't they hike or cut?" – would be diluted at least a little bit. The other benefit would be that in setting retail interest rates, there would be a greater opportunity for banks to adjust rates according to changes in funding costs as those pressures emerge rather than being held to account each time the bank changed rates.