The Reserve Bank of Australia is facing a major overhaul that would change how interest rates are set after a review into its future.

Treasurer Jim Chalmers will on Thursday hand down the report, and the federal government is expected to back its 51 recommendations.

It calls for the RBA’s responsibilities to be split, with the creation of two separate boards – one to set interest rates and the other responsible for governance.

The ABC reports a new monetary policy board would set the cash rate and would be made up of macro-economists, monetary policy specialists and labour market experts.

The governance board would oversee operations that don’t concern monetary policy and would bring the RBA in line with other central banks.

It would be the biggest shake-up of the Reserve Bank since the 1990s and comes after the RBA suffered serious “reputational damage” over its outlook that interest rates would not rise until 2024.

Months later, Australian households were hit by a series of 10 interest rate rises.

The report entitled ‘An RBA fit for the future‘ also recommends the RBA remain independent and that it keeps its inflation-targeting framework intact.

The Australian newspaper reports that RBA Governor Philip Lowe, whose seven-year term ends in September, is not expected to be reappointed later this year.

“The review is all about ensuring Australia’s central bank and monetary policy arrangements are as strong and effective as they can be into the future,” Dr Chalmers said.

He is also expected to name two new board members to replace outgoing members Wendy Craik and Mark Barnaba.

Some of the changes will need to be passed by Parliament, and shadow treasurer Angus Taylor has already signalled his party’s willingness to co-operate on sensible reforms.

Mr Taylor said it was enormously important for Australia to have an independent, credible and capable central bank.

“The Coalition’s input into this review has been centred on ensuring the Reserve Bank’s monetary policy approach remains laser-focused on returning inflation to the two-three per cent target and properly recognises the interaction of monetary and fiscal policy,” he said.

As well, any governance reforms should be balanced, appropriately staged, preserve the Reserve Bank’s independence and bolster its capabilities, he said.

The Albanese government began the review of the Reserve Bank last year.

-with AAP