The House of Representatives Standing Committee on Economics has made its expectations of the Reserve Bank (RBA) clear in a new report released on Thursday.
The Review of the RBA’s Annual Report 2021 follows a public hearing with representatives from the RBA, including governor Philip Lowe, back in September.
Among the topics scrutinised at this hearing were the central bank’s inflation target, its forward guidance on rate movements, and its planned path to bring inflation back to target.
“The committee appreciates that several factors influencing inflation could not have been foreseen. It also notes the RBA’s recently released review of forward guidance,” the House economics committee said in its report.
“However, the committee expects the RBA to continue to closely examine lessons learnt from its approach to forecasting, its use of modelling, and its approach to communication — and to consider how these can be improved.
“Australian households, workers and industries facing intensifying cost-of-living pressures and challenging work and business conditions deserve no less.”
During the hearing, the RBA conceded that it had made forecasting errors regarding inflation while noting that its assessments were in alignment with those of other global central banks.
The RBA said it has since made “material improvement” in its approach to near-term inflation forecasting, relying on newly available datasets. The central bank also told the committee that it remains committed to understanding its forecasting errors and improving its future methods.
As part of its report, the House economics committee said that it expects the RBA will “comprehensively analyse the socioeconomic and demographic segments from which demand-driven inflation is emanating, and the consequent impact of interest rate adjustments on the specific inflationary consumption behaviour of different cohorts”.
The report comes as the wide-ranging independent review of the RBA continues.
In November, the panel responsible for the review said that it had received criticisms regarding the central bank’s approach to implementing the monetary policy framework and communicating its decisions over recent years.
“The committee notes the importance of the independent review in the context of the complex and rapidly changing economic environment. The committee looks forward to discussing the outcomes of this review and the RBA’s internal reviews at future hearings,” the House economics committee said in its report.
Labor MP Daniel Mulino, who chairs the committee, said that bringing inflation down to manageable levels without pushing the economy into a recession will be a central challenge for the RBA over the coming months and years.
“With inflation not expected to return to within the target range until 2024, transparency in the RBA’s monetary policy decision-making will be paramount,” he said.
“The committee takes its responsibility to hold the RBA to account before the Australian parliament and its people very seriously and looks forward to further hearings next year.”
The House economics committee will next hear from the RBA on 17 February next year. Meanwhile, the independent review of the RBA is scheduled to produce a final report with recommendations to the government in March.
