The proposed move to establish a separate body within the Reserve Bank to make interest rates decisions in future, was "very bad policy" and "a leap of faith" which would undermine the authority of the governor, according to former governor Ian Macfarlane.
He has called on the government to open a public discussion about the proposals rather than immediately proceeding with them.
Implementing the recommendations of a review into the bank's operations — including establishing the new decision-making board — is regarded as one of the big challenges facing new RBA governor Michele Bullock, who started in the job this week.
Mr Macfarlane — governor between 1996 and 2006 — signed the historic agreement with the Howard government which established formal independence for the central bank and also set the 2 to 3 per cent inflation target still in use today.
Speaking exclusively to 7.30 on Wednesday night, Mr Macfarlane said having a committee of nine people setting monetary policy — with six part-time appointments from outside the bank — was "a very radical solution" and an experiment that goes against what every other central bank in the world has done.
It would undermine not just the authority of the governor but the accountability of the bank on the decisions it takes, he said.
"People have been led to believe that these proposals in the review are moving the Reserve Bank of Australia towards some sort of world's best practice. That's not the case," he said.
"It proposes a model for a central bank for Australia which is totally unlike any other central bank in the world."
The new model would give "the part-time members of the board the majority of the votes in monetary policy decisions".
Questioning the decision-making board
The Reserve Bank Board "has traditionally been largely an advisory board".
"The review proposes changing that and making a decision-making board with votes taken at the end of each meeting and published at the end of each meeting.
"If you look around at other central banks, the big ones, and by the big ones I mean for example the Federal Reserve Board in the United States, the European Central Bank, the Bank of Japan. They have decision-making boards, but all the members of the board are full-time employees of the bank, they are full-time professional central bankers.
"Some other central banks, led by the Bank of England, have added some part-timers to the board. But in every case, the part-timers are a minority."
Mr Macfarlane questioned who might actually join the board.
"If you read the review, you will get the impression that the part-timers would all be academic economists from the universities," he said.
"That wouldn't be a great deal of help because the Reserve Bank's already a very academic institution, with lots of PhDs from the best universities there. So you would just be adding more of the same, so I wouldn't support that."
The review says that anybody who had expertise in financial markets, in the labour markets, and in the supply side of the economy could apply.
"Once you do that, you open up the floodgates so just about anyone would qualify for one of those headings.
"I'm not objecting to broadening membership away from academic economists, that essentially just means we know even less about who is likely to be appointed."
Mr Macfarlane said the part-time board members would be working "one day per week" and would probably not have their own staff or resources.
He also argues that, most importantly, they would not have any "on-the-job" experience.
"Most people who reach a senior level in anything, when they look back, they realise that nearly all their accumulated knowledge they got it on the job, on the job learning."
Government 'should be open to public discussion'
There is concern among some senior policy officials that the broad description of who could apply to join the board could lead at some point in the future to it being stacked with political "mates" of the government of the day who may also feel under political pressure on interest rate decisions.
Most significantly though, Mr Macfarlane said the move "greatly weakens the position of the governor" and, as a result, would raise questions about the stance of policy.
"Future governors will be put in, well they would have had a lot of their decision-making power taken away from them and handed over to the part-timers. And in fact, it could reach a situation, I think probably would, that future governors would not be sure how the votes would fall on the next meeting.
"So if you consider a governor appearing before the public or appearing before the parliamentary inquiry or something, and being asked for a very frank statement about what the priorities for monetary policy were, they would be in a very difficult position. If they didn't know what was going to happen at the next meeting.
"They'd have to be, I think, vague and have a bet each way.
"And of course, we couldn't rule out governors being outvoted at the meeting. In which case they would find themselves in that position where they were the public's spokesperson for monetary policy, but for a monetary policy they'd voted against. How much conviction would they carry when they spoke?
"We know it's accountable now, and we know if things go wrong, if the public is angry, we know who they hold responsible is the governor, as the outgoing governor can attest. But under this new regime if it was to come into force the governor could legitimately say it wasn't me it was these part-timers who made that decision."
Mr Macfarlane says the government "should open it to public discussion".
"I remember previous things like the Campbell committee and the Wallis committee and they were always open to public discussion before the government accepted some of the proposals. They should have done it this time and they should now do it."
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