Speaking at the Australian Financial Review Banking Summit on Tuesday, Hunter highlighted that global instability, evolving inflation dynamics and the lagging effects of previous rate hikes are complicating decision making for policymakers.
“We are uncertain about both the outlook for the economy and the effect of monetary policy, and this complicates policy decisions,” she said.
“Under uncertainty, policy depends on more than just the central forecast – judgements about the risks and uncertainties matter too.”
Hunter made it clear the RBA isn’t just fixated on a single economic forecast, instead, it is weighing multiple potential scenarios, keeping its options open on interest rates in the months ahead.
The assistant governor’s comments come as the RBA faces a delicate balancing act between managing inflation and supporting economic growth. While inflation has moderated, it remains above target, and the labour market remains tight.
“Central bankers and macroeconomists often say that monetary policy impacts the economy with a lag,” Hunter said.
“So, if inflation moves away from our target, or employment falls below full employment, monetary policy cannot immediately offset those moves. Instead, central banks have to look ahead.”
She also stressed that RBA board decisions are always made under uncertainty, requiring a broader assessment of risks rather than a strict reliance on forecasts.
“One of the things we are focused on right now is US policy settings, the impact of these on the global economy and how this flows through to activity and inflation here in Australia; we have been using scenarios, analysis and judgement to assess the policy implications,” she said.
Referencing the RBA’s February decision to ease policy slightly, Hunter noted that while the board saw room to reduce restrictiveness, it remained more cautious than markets about further rate cuts.
Highlighting the RBA’s nuanced approach, she pushed back on the idea that being forward-looking contradicts being data dependent.
Data dependence, she explained, doesn’t mean reacting mechanically to every new data point, instead, “we are data dependent in the sense that incoming data affects our view of where the economy is today and the outlook, and this in turn influences the path for policy”.
Earlier this month, the Reserve Bank stressed that its first rate cut in four years does not guarantee further reductions, with future decisions to be guided by economic data and evolving risks.
In the minutes of its February meeting, the RBA acknowledged that progress had been made in taming inflation but left the door open for rates to stay higher for longer if inflation proves more persistent than expected.
Looking forward, the RBA said: “Future decisions would be guided by the incoming data and evolving assessment of risks.
“Returning inflation to target remains the board’s highest priority and it will do what is necessary to achieve that outcome.”
The RBA delivered its first rate cut in over four years last month, reducing the rate from 4.35 per cent to 4.10 per cent.
The consensus among economists and fund managers seems to be two more cuts this year, though some are so dovish they’re predicting a total of four cuts in 2025 – including the Commonwealth Bank.
