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How Does the Reserve Bank Decide?

published  First Published: 20/01/2010
Article written by: Nigel Brookson
As the next cycle of interest rate rises commences, Reserve Bank governor Glenn Stevens has given an insight into the process behind the decisions.
 
Perhaps in an attempt to head off the inevitable flak that comes the bank's way when it raises interest rates, Mr Stevens painted a picture of how the eight men and one woman who sit on the board determine the interest rates Australians have to pay on mortgages or receive on savings accounts.
 
The board is currently made up of two Reserve Bank employees (Mr Stevens and his deputy Ric Battellino); the Treasury secretary Ken Henry; Professor Warwick McKibbin, an academic economist from ANU; and five people you could describe as 'serial' company directors - John Akehurst, Jillian Broadbent, Roger Corbett, Graham Kraehe and Donald McGauchie.
 
The first point he makes is that the board is not directed, but merely advised by the Reserve Bank's team of economists and analysts.
 
"The board, I can assure you, is no rubber stamp and its members are no group of shrinking violets," he says.
 
"They come from a diverse set of backgrounds. They bring their own experiences and their own independently gleaned pieces of information about what is going on."
 
Interestingly, none of those backgrounds includes an average wage or salary earner not employed by the public sector.
 
So it's probably a safe bet that none of them meets the description of a typical home loan borrower, on a typical wage.
 
The majority of the board (five out of nine) comes from big business, representing companies such as Coca-Cola Amatil, Fairfax, BlueScope Steel and James Hardie.
 
The process
 
However, the board members don't go into the meeting with a blank canvas.
 
They are briefed by a small army of analysts and economists employed by the Reserve Bank to decipher the "thousands of individual data series" that the bank reviews, and to liaise with business about current trading conditions (although, given the make-up of the board, one could be excused for thinking that any additional big business liaison was superfluous).
 
The technocrats, who at least probably more closely match the wages and conditions of the average Australian, give a four or five page paper about current economic, financial and business conditions to the board members on the Friday before the Tuesday meeting.
 
Mr Stevens also offered a description about the course of a typical board gathering.
 
"This discussion usually takes about three hours. It is, I would think, the most intense regular discussion of the state of the economy that occurs anywhere in the country, as of course it should be," he said.
 
"At the end of the discussion, the governor, as chairman of the board, will sum up and introduce the policy question. Each member has an opportunity to give their view and their reasoning on the decision at hand. Typically a consensus emerges and the decision is then taken."
 
Again, given the very similar backgrounds of many of the board members, it is hardly a surprise that decisions are usually consensus-based.
 
Mr Stevens doesn't give any indication of how the board breaks a deadlock, if one emerges.
 
Then come the economic tea leaves which have the media and currency traders hanging off every word.
 
The initial 2:30pm statement comes out under Glenn Stevens' name because, "the members are usually content to leave the precise wording to the chairman, on the understanding that the statement will be consistent with the discussion at the meeting".
 
After the flood of commentary on the statement, and reaction to the rate decision, there's a pause while the bank prepares its longer version of the minutes.
 
"Subsequently, the draft minutes of the meeting are prepared. These are finalised after members have the opportunity to comment on the draft during the following week, and are released publicly on the Tuesday two weeks after the meeting," Mr Stevens said.
 
Analysts and commentators pore over these for any further hints about where rates are heading, while those paying off home loans are left to analyse their new financial position.
 
Meanwhile, the technocrats are busy preparing next month's briefing and the whole process starts again.
 

 

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