New Reserve Bank review could change how it makes rate hikes – so how could this affect your home loan?

The Reserve Bank of Australia (RBA) received a spectacular dressing down this week with the release of a comprehensive review made by the Australian Treasury. 

While the RBA review had plenty of praise for the central bank, it also levied strong criticism at its economic management over the last thirty years and made over fifty recommendations for improvement.

Key themes include diversifying viewpoints within the central bank, creating new internal processes, and better aligning monetary and fiscal policy. 

While these changes aren’t yet official, Australian treasurer Jim Chalmers says they’re all backed by the Australian government “in principle”. Indeed, RBA governor Philip Lowe declared the bank will work closely with the government to implement the changes over the next year. 

So what’s actually happening? And what could this all mean for home buyers?

Let’s dive in.

Out of the 51 recommendations made in the report, the most significant changes include shake ups to how the RBA sets official interest rates. 

Chiefly, the review suggests creating a separate interest rate setting board staffed with monetary policy experts that only meets eight times a year, as opposed to eleven. This could potentially slow down the pace of future cash rate movements while revamping the RBA’s approach to managing inflation in the economy, aligning it with international counterparts like the Bank of England.

While the review praised the RBA for its efforts in the last thirty years, the pandemic has severely tested the central bank and exposed its strengths and weaknesses. 

Most importantly, the review suggests the RBA has frequently misjudged the impacts and causes of inflation, focusing too much on wage growth rather than supply-side pressures.

Much of this criticism hinges on how and when the board made changes to the cash rate. Pre-pandemic, many pundits thought  the cash rate was too high, smothering growth. During the pandemic, however, the cash rate may have been brought too low, hitting a historic nadir of 0.10% in November 2020. 

Then when inflation took off in 2021 - 2022, the central bank proved slow to react – though it was far from the only government body caught off guard.

“The Reserve Bank board’s current processes do not provide members with enough information, time or support to sufficiently explore policy options and strategies or to challenge RBA views,” the review explains.

“The RBA and Monetary Policy Board should make changes to deepen the Board’s deliberation on monetary policy and ensure it is open to a wide range of inputs.”

But with so much emphasis falling on the handling of rate hikes, what could these shake-ups mean to those affected by hikes the most: home loan borrowers?

In theory, if the review’s proposals had been in place before the pandemic, interest rates may not have gone so low and would have bounced up much quicker in response to inflation. The pace of rate hikes may also have slowed, thinned out over eight decisions instead of ten. 

This may somewhat have smoothed over the 2020 - 2021 property boom by reducing demand while tightening the interest offered on variable home loans, making the windows to save smaller and refinance larger. 

But this can be difficult to judge. Property prices have grown in the last thirty years regardless of economic conditions, and there’s always a give and take between what benefits borrowers and what benefits savers. Good for borrowers means bad for savers, and vice versa.

Indeed, while the review may change what the RBA considers when making monetary decisions, very little may change on the ground for borrowers. Inflation will still mean rate hikes – recessions, rate cuts. Rates just may not lean so hard in either direction.

If anything, the review reaffirms the importance of checking in with the economy. After all, inflation and the high cost of living affect everyone, especially vulnerable Australians.

“[By] working to keep inflation low and stable, central banks contribute to more stable growth in incomes and employment, reducing the risk of the kind of economic instability that is most harmful to those that can least afford it,” reminds the review. 

For now, it remains the RBA’s job to look after the economy, just as it remains our job to look after our own finances. For those paying off a mortgage, this could mean comparing home loans and ensuring you’re on a good rate.

Otherwise, it may be time to make some changes of your own.

Jumping ship from your lender? Compare refinancing rates on home loans below.