The core objectives of the Reserve Bank of Australia (RBA) — what it tells the public and who sits on its board — will be scrutinised in the first review of the central bank and its operations in decades.

Treasurer Jim Chalmers has released the terms of reference for a wide-ranging review of the central bank, including its primary task of keeping inflation between 2 and 3 per cent.

Mr Chalmers said the RBA had "served Australia well" but the review was about "ensuring we have the world's best and most-effective central bank into the future".

The review follows a difficult period for the RBA, which lowered the cash rate to a record low of 0.1 per cent during the earlier stages of the COVID-19 pandemic but has recently had to chase surging inflation with rapid hikes.

Changing the official cash rate, which flows through to interest rates, is the primary tool the RBA has to control inflation.

However, it is considered a blunt tool, as changes to interest rates have a broad impact on the economy.

Having a specific target for inflation, but not other economic indicators, has also been questioned in recent years.

In light of that, the review will look at the "appropriateness of the inflation-targeting framework" and how the RBA's moves interact with government spending.

The review will also consider the RBA's conduct "during crises and when monetary policy space is limited", which opens the door to an examination of quantitative easing. 

Mr Chalmers said the RBA's performance "in meeting its objectives" would also be scrutinised, a sensitive issue given the central bank's recent forecasts on inflation — and of its own cash rate moves — have missed the mark.

More transparency in board processes

Who sits on the RBA board and how they come to decisions on the cash rate will also be examined, with an eye to potentially making the process more transparent.

The "board structure, experiences and expertise, composition and the appointments process" will be part of the review's remit.

Currently, the RBA publishes a statement on its cash rate decisions and minutes of its meetings.

However, some central banks in other countries publish more detail about differing views or perspectives within their boards to provide more clarity to policy makers, financial markets and the public.

Appointments to the RBA are often drawn from the business community, which differs from the approach of countries such as the United States, where the board of its Federal Reserve is comprised of economists.

The Australian Council of Trade Unions' secretary, Sally McManus, has called for a board seat to be set aside for the union movement, arguing experience in wage-setting is lacking in the current board structure. 

Professor Carolyn Wilkins, who has worked with the central banks of Canada and the UK, Professor Renee Fry-McKibbin, a leading macroeconomist at the Australian National University, and Dr Gordon de Brouwer, the secretary for public sector reform will conduct the review.

The trio will deliver their report, with recommendations for the federal government, by March 2023.

"This is an important opportunity to ensure that our monetary policy framework is the best it can be, to make the right calls in the interests of the Australian people and the economy."