Reserve Bank to keep its inflation-fighting focus in biggest overhaul in three decades

The federal government is expected to reaffirm its support for the RBA's inflation-targeting framework and independence when Treasurer Jim Chalmers on Thursday releases the findings of the first comprehensive review of the central bank since current policy arrangements were put in place in the early 1990s.

In a move that could have far-reaching implications for how the Reserve Bank operates and communicates monetary policy, the review is understood to recommend that the functions of the existing RBA board be split between two newly-created groups: a Monetary Policy Board and a Governance Board.

Details of the composition and responsibilities of the two boards, and the process by which members will be selected, are likely to be closely examined when the review is released.

There is likely to be particular interest in who gets to sit on the Monetary Policy Board, given persistent criticism that membership in its present nine-member configuration is too narrow and does not adequately reflect the breadth of interests and experience in the broader community.

The idea to split the central bank board's functions is one of 51 proposals advanced by the RBA review, all of which are expected to be agreed to in-principle by the government.

The proposal to change the structure and operations of the RBA, particularly its policy-making board, comes at a challenging time for the institution, which has come under intense scrutiny over its handling of monetary policy, especially in tackling the nation's inflation problem.

The central bank has attracted significant criticism over its decision to hike interest rates by 3.5 percentage points since May last year in an attempt to tame inflation.

While there is mounting evidence that its actions are working to reduce demand and ease price pressures, it has come at an increasingly heavy cost for indebted and low-income households and businesses.

Economic forecaster Deloitte Access Economics estimates that at least 300,000 families are already experiencing negative cash flow as loan repayments and essential spending outstrips earnings.

Governor Philip Lowe has faced particular criticism over remarks he made in 2021 that were widely interpreted as assuring the low interest rates would persist through to at least 2024.

The way the Reserve Bank communicates with markets and the broader community is expected to be a focus for the review. It may include proposals around the transparency of monetary policy deliberations, though many doubt it will suggest copying the US Federal Reserve in disclosing how individual board members vote.

The review is also not expected to comment on the performance of Dr Lowe, whose term ends in September. The treasurer has said a decision over the governor's future will be made "in the normal course of events towards the middle of the year".

Dr Chalmers said the review, which was informed by 1500 submissions and other contributions as well as consultations with 137 international and local experts and businesses, unions and community groups, was "a significant piece of work".

"The review is all about ensuring Australia's central bank and monetary policy arrangements are as strong and effective as they can be into the future," he said, adding that he looked forward to "working across the parliament and with the RBA to implement the recommendations".

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The treasurer has proclaimed his ambition for there to be bipartisan support for RBA reform, some of which will require legislative change.

Opposition treasury spokesman Angus Taylor was provided with a copy of the report earlier this week and Dr Chalmers has discussed the review's outcomes with his Opposition counterpart.

Speaking on ABC radio, the opposition treasury spokesman welcomed the "very positive" direction of the RBA Review.

Mr Taylor said the Coalition was "very open" to the proposal to split the functions of the RBA board and create a dedicated Monetary Policy Board to set interest rates and a separate Governance Board to oversee the central bank's strategy and operations.

"At face value, the direction of this is positive," he said.

"The key here is to make sure we have a group of people around the table making interest rate decisions who are very focused, who have deep expertise, where there is real intellectual diversity."

Mr Taylor said the Coalition would consider the details of the review's recommendations, but his initial response was promising for Treasurer Jim Chalmers, who had made clear he was keen to secure bipartisan support for the RBA reforms.

But Greens leader Adam Bandt dismissed the RBA review as a "major party stitch-up" and called for the departure of Governor Philip Lowe.

Bipartisanship is considered to be critical because of the RBA's independence in setting monetary policy.

Implementation of some of the review's recommendations is expected to fall to the Reserve Bank itself, while others will involve working with the Council of Financial Regulators, which includes Treasury, the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission.

It is understood Dr Chalmers will also use the occasion of the review's release to announce the appointment of two new members to the RBA board to replace retiring members Wendy Craik and Mark Barnaba, neither of whom has sought reappointment.