Lessons from the RBA Reformation

Be the something, when something must be done

Inflection Points is hosting a panel this week on how economic reform happens. They cover the process of banning non-competes and in that spirit I thought I would write up the lessons reformers should take from the recent changes at Martin Place.

There are some policy changes that take years of grinding advocacy. The politics are hard. The technical case is contested. Stakeholders line up in opposition. Rounds of consultation are followed by draft bills, and redrafts, and then—maybe—a minor shift at the margin. Tax policy is perpetually stuck in this morass.

Then there are changes that arrive all at once. Where, in hindsight, the arguments were obvious, the resistance turns out to have been soft, and everything shifts quickly.

The Reserve Bank of Australia reform was the latter.

This is what I would have expected ex-ante. Changing how monetary policy is made is deeply technical. It affects billions of dollars in mortgage interest and business investment. It touches the core of macroeconomic management. And yet the reform happened surprisingly quickly with a review commissioned in 2022, tabled in 2023, and by 2024 the government had agreed to and implemented every single one of its 51 recommendations.

Here are six lessons from the process.

If it isn’t visibly broken, it won’t be fixed.

The intellectual underpinnings of the RBA Review have been around for a long time. The practice of appointing monetary policy experts to central bank boards has been an international norm since the 1990s. Similarly, the case for increased transparency—like published meeting minutes and detailed communication of decisions—has been on the table for at least a decade, thanks in large part to work like the Warsh Review, commissioned by the Bank of England. So the question arises: if the ideas were already there, why weren’t they implemented?

The most parsimonious explanation is that the RBA status quo didn’t seem to be broken. The inflation target was in place, rates moved up and down with the cycle, and for the most part, the institution appeared to work. That meant there was little pressure—political or public—to pursue reform. The GFC in particular was largely seen as a successful episode of Australian macroeconomic management. And so nothing changed even when there were other examples out there.

This is the first lesson: poor institutional design can survive for a long time if it doesn’t lead to obvious policy errors. You don’t replace the plumbing if the water still runs. But that doesn’t mean the plumbing isn’t leaking quietly behind the walls.

It takes a long time to fail

The RBA first fell below the lower bound of its inflation target band in 2014. But it wasn’t until half a decade later—after years of weak wage growth, persistently low inflation, and lacklustre communication—that serious public attention was paid to whether the framework itself was functioning.

This was not a story of one catastrophic mistake or a sudden policy blunder. There was no Lehman moment. Instead, it was a long period of underwhelming outcomes—missed targets, unexplained decisions, lost opportunities to support employment—that finally wore down institutional goodwill.

The lesson is that major reform is rarely sparked by a single bad decision. Often it is the result of cumulative disappointment. People are remarkably tolerant of low-level failure, especially when institutions are opaque and accountability is diffuse. A similar dynamic is at play in Australia’s planning system which has been slowly suffocating our housing market for decades. Experts need to be the canary in the coal mine - pointing out failures early and often before it metastasizes big enough for the problem to become unavoidable even to the lay person.

Sometimes, it pays to be unlucky.

One of the most consequential actors in the push for reform was Dr Andrew Leigh. Ironically, he only became a member of the House Economics Committee in July 2019 because he was demoted from the Labor ministry following the 2019 election. In most careers, that would be a setback. In this case it became a career defining opportunity.

As a backbencher on the House Economics Committee Leigh, liberated from shadow ministerial responsibilities, was able to dedicate serious attention and questioning to the RBA. His probing of the RBA governors—detailed, persistent, and often confrontational— created public pressure on the institution in a way that had never occurred before. His committee work stands as one of the most effective examples in recent Australian history of how a backbencher can drive serious policy change.

The lesson? Sometimes you need good luck — or, more precisely, on people making the most of their bad luck.

You need the Fourth Estate

One of the pivotal moments in the RBA reform timeline was the publication of a series of articles by Shane Wright. Over the course of a four-day series, Wright laid out the issues with the RBA in all their gory detail citing the broad spectrum of experts who had long been talking about the issue and Leigh’s work in Parliament.

The articles were rightly award-winning. But more importantly, they helped shift the political narrative. They made it difficult for either major party to ignore the issue. Indeed it led to both sides to commit to undertaking a full review of the RBA’s structure and performance after the upcoming election.

Wright’s work helped turn reform into a bipartisan push. You can’t change institutions unless people understand the problem. And for people to understand, someone has to tell the story. Journalists, often informed by the subject matter experts, can play a critical role in translating technical issues into political ones. Reformers can’t ignore the role the media plays in helping to set the policy agenda.

The Dark Matter of Economic Reform

In astrophysics, dark matter is a completely invisible and unobservable form of matter—its existence is only inferred from the gravitational effects it exerts across the universe. The Commonwealth Treasury is the dark matter of economic reform—rarely seen or heard, but profoundly influential.

If you were following the RBA Review through the newspapers, you might think it was highly contentious, even risky. That was certainly the view of many former governors, retired politicians, newspaper columnists, and even some academics—not to mention the RBA itself. Yes, there were supporting voices too—some academics and commentators from outside the traditional policy space—but they were often outnumbered and out-platformed by those defending the status quo. And while a review had been promised there was no guarantee that it would be one with serious teeth.

So why did the government press ahead with an ambitious reform package largely undeterred?

It is a common misconception that the only monetary policy experts outside Martin Place reside in the ivory towers of academia. In fact, the largest concentration of macroeconomists in the country is not at the RBA—it’s at the Treasury in Canberra.

But by their nature Treasury economists can’t publicly engage in debate. They don’t write op-eds, give interviews, or publish commentary. Their voice is almost entirely confined to the briefings they provide to the Treasurer. As a result, gauging exactly what the Treasury does or doesn’t support can be quite speculative.

Even so I think it’s a safe bet that the Treasury was firmly behind the RBA reforms. You can read it between the lines—and occasionally see it more clearly in the comments of former Treasury officials who are finally able to speak their minds such as Steven Hamilton in the pages of the AFR.

This helps explain a broader puzzle in policy reform: why some apparently risky or controversial reforms move ahead with surprising speed, while other seemingly popular ideas never leave the launch pad. The Treasury's stance may not be the only thing that matters, but it surely counts for a lot. And in this case, I suspect their support for the RBA Review was more than enough to outweigh a long list of establishment voices defending the system they helped build.

Be the something, when something must be done

The pandemic years were tough on every institution. But the RBA made several decisions that (unfairly IMO) were seen as major missteps. Most notably, the guidance that interest rates were unlikely to rise until 2024—guidance that, when reversed sharply in 2022, was deeply unpopular.

That left the RBA unusually exposed to a surge of populist anger and accordingly there was a strong general vibe that the government should do something about the RBA. While the popularist preference of overruling the RBA was never going to happen this anger did make it easier to give the reform teeth and the drive to make substantial changes.

Ironically, of course, the RBA review largely excused the mistakes made during the pandemic and their main recommendation was to include more experts more economists and a tighter inflation target, which I do not think the average punter would have seen as the optimal response to their disgruntlement with the RBA.

But there are times when something has to be done and if you happen to have a just-add-water plan for “reform” then that something can be your thing. You can see a similar dynamic at play in the current push to reform childcare, where a lot of (hopefully good) ideas are getting implemented, even if they didn't have much to do with the original terrible inciting incident that led the push for reform.

Institutional reform happens rarely, but when it does we should take notes of what works as it is certainly in short supply!