NO.063

REAPPOINTMENT OF MR IAN J MACFARLANE AS GOVERNOR OF THE RESERVE BANK

OF AUSTRALIA

I am pleased to announce the reappointment of Mr Ian J Macfarlane to the position

of Governor of the Reserve Bank of Australia for a term of three years, from

18 September 2003 to 17 September 2006.

The maximum period for any one term as Governor is seven years. In completing

his first term, Mr Macfarlane will have already served seven years and has indicated

that, rather than be reappointed for another full term, he would prefer an appointment

for three years. This will mean that he will have served as Governor for a decade,

and will leave office at the age of 60. In serving out this term, Mr Macfarlane

will become the second-longest serving Governor of the Reserve Bank after Dr

HC Coombs.

Mr Macfarlane has been Governor of the Reserve Bank since September 1996.

Prior to that, he was Deputy Governor and Assistant Governor (Economic). Before

joining the Reserve Bank in 1979, Mr Macfarlane worked in the Economics Department

of the OECD in Paris for six years and also spent some time with the Institute

for Economics and Statistics at Oxford University. Mr Macfarlane holds an Honours

and Masters degree in Economics from Monash University and is Fellow of the

Academy of Social Sciences in Australia.

Mr Macfarlane has a wealth of central banking experience and has been closely

involved with the development of monetary policy in Australia since he joined

the Bank. He has served his first term with great distinction and has presided

over a period of sustained price stability. Governor Macfarlane’s leadership

and expertise have been instrumental in the success of the Reserve Bank Board’s

conduct of monetary policy.

The Governor’s appointment is made in accordance with section 24 of the Reserve

Bank Act 1959.

I have agreed with the Governor that it is timely for the Government and the

Reserve Bank to reaffirm and update their mutual understanding of the operation

of monetary policy in Australia. In announcing the reappointment, I have released

a revised Statement on the Conduct of Monetary Policy that has been agreed between

myself and the Governor. The second Statement records the common understanding

between the Government and the Reserve Bank on key aspects of Australia’s monetary

policy framework and in terms of the respective roles and responsibilities in

the operation of monetary policy.

In carrying out the 1996 Agreement, the Reserve Bank has taken steps to make

the conduct of monetary policy more transparent. Its public commentary on the

economic outlook and issues surrounding monetary policy settings, quarterly

statements on monetary policy and monthly bulletins as well as research and

discussion papers have been crucial in promoting increased public discussion

and understanding of the conduct of monetary policy.

Changes to the Statement reflect current practice and will continue to ensure

the transparency and accountability of the Reserve Bank’s conduct of monetary

policy.

I take this opportunity to congratulate the Governor on his reappointment.

CANBERRA

Tuesday, 29 July 2003

Contact: David Alexander

(02) 6277 7340

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SECOND STATEMENT ON THE CONDUCT OF MONETARY POLICY

The Treasurer and the Governor of the Reserve Bank

July 2003

This statement records the common understanding of the Governor, as Chairman

of the Reserve Bank Board, and the Government on key aspects of Australia’s

monetary policy framework. It builds on the 1996 Agreement between the Treasurer

and the Governor on the respective roles and responsibilities in the operation

of monetary policy in Australia.

Monetary policy is a key element of macroeconomic policy and its effective

conduct is critical to Australia’s economic performance and prospects. For this

reason, and given the reappointment of the Governor of the Reserve Bank, it

is appropriate and timely for the Governor and the Government to reaffirm and

update their mutual understanding of the operation of monetary policy in Australia.

This statement should continue to foster a better understanding, both in Australia

and overseas, of the nature of the relationship between the Reserve Bank and

the Government, the objectives of monetary policy, the mechanisms for ensuring

transparency and accountability in the way policy is conducted, and the independence

of the Bank.

Relationship Between the Reserve Bank and the Government

The Reserve Bank Act 1959 (the Act) gives the Reserve Bank Board the power

to determine the Bank’s monetary policy and take the necessary action to implement

policy changes. The Act nominates the Governor as Chairman of the Board.

The Government recognises the independence of the Bank and its responsibility

for monetary policy matters and intends to respect the Bank’s independence as

provided by statute.

Section 11 of the Act prescribes procedures for the resolution of policy differences

between the Reserve Bank Board and the Government. The procedures, in effect,

allow the Government to determine policy in the event of a material difference;

but the procedures are politically demanding and their nature reinforces the

Bank’s independence in the conduct of monetary policy. Safeguards like this

ensure that monetary policy is subject to the checks and balances inherent and

necessary in a democratic system.

In addressing the Bank’s responsibility for monetary policy the Act provides

that the Board shall, from time to time, inform the Government of the Bank’s

policy. Such arrangements are a common and valuable feature of institutional

systems in other countries with independent central banks and recognise the

importance of macroeconomic policy co-ordination.

Consistent with its responsibilities for economic policy as a whole the Government

reserves the right to comment on monetary policy from time to time.

Objectives of Monetary Policy

The goals of monetary policy are set out in the Act which requires the Board

to conduct monetary policy in a way that, in the Board’s opinion, will best

contribute to:

1. the stability of the currency of Australia;
2. the maintenance of full employment in Australia; and
3. the economic prosperity and welfare of the people of Australia.

The first two objectives lead to the third, and ultimate, objective of monetary

policy and indeed economic policy as a whole. These objectives allow the Board

to focus on price (currency) stability while taking account of the implications

of monetary policy for activity and, therefore, employment in the short term.

Price stability is a crucial precondition for sustained growth in economic activity

and employment.

Both the Bank and the Government agree on the importance of low inflation

and low inflation expectations. These assist businesses in making sound investment

decisions, underpin the creation of new and secure jobs, protect the savings

of Australians and preserve the value of the currency.

In pursuing the goal of medium term price stability, both the Bank and the

Government agree on the objective of keeping consumer price inflation between

2 and 3 per cent, on average, over the cycle. This formulation allows for the

natural short run variation in inflation over the cycle while preserving a clearly

identifiable benchmark performance over time.

Since the first Statement on the Conduct of Monetary Policy in 1996 inflation

has averaged 2.4 per cent. The Governor takes this opportunity to express his

continuing commitment to the inflation objective, consistent with his duties

under the Act. For its part the Government indicates again that it endorses

the inflation objective and emphasises the role that disciplined fiscal policy

must play in achieving such an outcome.

Transparency and Accountability

Monetary policy needs to be conducted in an open and forward looking way.

A forward looking focus is essential as policy adjustments affect activity and

inflation with a lag and because of the crucial role of inflation expectations

in shaping actual inflation outcomes. In addition, with a clearly defined inflation

objective, it is important that the Bank continues to report on how it sees

developments in the economy, currently and in prospect, affecting expected inflation

outcomes. These considerations point to the need for effective transparency

and accountability arrangements.

In carrying out the 1996 Agreement, the Reserve Bank has taken steps to make

the conduct of monetary policy more transparent. Changes in monetary policy

and related reasons are now clearly announced and explained. In addition, the

Bank’s public commentary on the economic outlook and issues bearing on monetary

policy settings, through public addresses, its quarterly statements on monetary

policy and monthly statistical bulletins, have been crucial in promoting increased

understanding of the conduct of monetary policy. The Bank will continue to promote

public understanding in this way.

The Governor has also indicated that he plans to continue to be available

to report on the conduct of monetary policy twice a year to the House of Representatives

Standing Committee on Economics, Finance and Public Administration.

The Treasurer expresses support for these arrangements, which ensure the continued

transparency and accountability of the Reserve Bank’s conduct of monetary policy

 and therefore the credibility of policy itself.

The Government and Bank continue to recognise that outcomes, and not the arrangements

underpinning them, will ultimately measure the quality of the conduct of monetary

policy.