Appearing before the House of Representatives standing committee on economics on Friday (17 February), governor of the Reserve Bank of Australia (RBA) Philip Lowe, and assistant governor Luci Ellis, faced questioning over the central bank’s monetary policy strategy.
The RBA officials were asked to justify the scale and speed of their cash rate adjustments since commencing a tightening cycle in May last year.
Labor MP Dr Andrew Charlton referenced minutes from the RBA’s October board meeting after reducing the size of rate hikes to 25 bps following several 50 bps hikes.
The RBA had suggested the step down was aimed at extending the length of the tightening cycle, “drawing out policy adjustments” to “keep public attention focused for a longer period”.
When asked to explain the RBA’s rationale, governor Lowe said the main purpose of prolonged tightening was to serve as a guard against “global uncertainties”.
However, he went on to argue that smaller hikes over a longer period of time could help reduce complacency.
“If you’re doing it consistently over a number of meetings, it keeps public attention on monetary policy and the seriousness of the task that we have set,” he said.
But the RBA governor conceded he was “not aware” of any evidence to support the central bank’s assumptions, adding it’s an “issue of judgement”.
Assistant governor Ellis then revealed there was little evidence to suggest the pace of rate hikes made any real difference to the eventual outcome of the tightening strategy — comparing 300 bps hikes over a “couple of months” to incremental 25 bps increases.
“If you put those paths at the beginning of a forecast horizon, with any standard macro model, you’ll get almost no difference,” she said.
“So, from the perspective of interest rates to observable variables, like output, unemployment, and inflation, it really doesn’t matter.”
She went on to echo governor Lowe’s comments, claiming a longer path to the terminal cash rate would help underline the seriousness of the Reserve Bank’s inflation management strategy.
“In the end, most people are not paying attention to economic news every minute of the day.
“…I don’t think there’s definitive research on this but I think there is actually a lot of active research on how expectations are formed.”
Since May 2022, the Reserve Bank has actioned nine consecutive hikes to the official cash rate, most recently lifting rates by 25 bps to 3.35 per cent.
In its latest state on monetary policy, the Reserve Bank hinted at further hikes over the coming months, with governor Lowe warning inflation remains “way too high”.
ANZ Research recently revised its monetary policy expectations, now projecting three additional hikes to the cash rate in March, April, and May — taking the cash rate to a peak of 4.1 per cent.
However, in his latest appearance before parliament, governor Lowe revealed forecasts of an easing in monetary policy in early 2024 are “plausible”, provided the RBA makes progress towards its inflation target of 2–3 per cent.
