The Reserve Bank (RBA) has reverted to its old practice of providing guidance, revealing in its latest minutes that a short-term reduction in the cash rate target is “unlikely” despite a notable misstep a few years ago.
During the pandemic, former RBA governor Philip Lowe stated that “a hike is unlikely before 2024”, only to pivot shortly thereafter and initiate a steep rate hike cycle.
Just before leaving the RBA, Lowe admitted that the forward rate guidance he provided during the pandemic had defined his term as RBA governor.
“With the benefit of hindsight, my view is that we did do too much. But hindsight is a wonderful thing. None of us can predict the future and we have had to make decisions under great uncertainty and with incomplete information,” he conceded.
However, it appears that after it seemingly swore off the practice after the 2021–22 “no rate hike before 2024” saga, the RBA has made a conscious decision to return to time-based interest rate guidance.
The words the bank is unlikely to cut rates in the “near term” were first employed by current governor Michele Bullock in the post-meeting statement earlier this month. She then reiterated this in parliamentary testimony, before the words surfaced again in the bank’s latest minutes published on Tuesday.
In his market update late last week, AMP chief economist Shane Oliver said that it is surprising to see the bank revert to its old ways.
Elaborating on this, Oliver told InvestorDaily on Tuesday: “It’s surprising because I thought the RBA was trying to avoid giving such specific guidance.
“Such time or calendar-based guidance is useful in terms of framing expectations and hence behaviour by households and businesses, which in this case would be serving to dampen spending. But the danger is that if things turn out differently to the RBA’s expectations, e.g. with weaker inflation and jobs data or a sharp fall in share markets, and the RBA then cuts, it will again lose credibility much as former governor Lowe did in 2022 when he hiked after guiding that he wouldn’t till 2024,” the economist said.
“Of course, the RBA does have an off ramp but Lowe had similarly qualified his comments, and media headlines and hence community perceptions tend to gloss over such qualifications. Of course, there would be far less community annoyance with an early rate cut as opposed to the start of rate hikes back in 2022.”
Despite its guidance, Oliver continues to believe the RBA will start to cut in February on the back of slower growth, higher unemployment, and lower inflation than it’s currently forecasting.
Complex decision
The RBA’s rate hike deliberations appear to have been more extensive than usual in August, suggesting that the bank is losing its patience with inflation.
The issues troubling the bank include the slow pace of disinflation over the preceding year and a potentially larger-than-expected gap between aggregate demand and supply. This, coupled with the recent volatility in financial markets, raises the risk of inflation not returning to target within a reasonable time frame, the bank said.
“Based on what they knew at the time of the meeting, members agreed that monetary policy would need to be tighter than this implied path in order to bring inflation sustainably back to target within a reasonable time frame,” the bank’s minutes read.
While they pondered a rate increase, members eventually decided it was possible to achieve a comparable degree of tightening in financial conditions as an increase in the cash rate by holding the cash rate at its current level for longer than pundits expect.
After weighing up the alternatives, the RBA said its “members decided that the case to leave the cash rate target unchanged at this meeting was the stronger one”.
“They agreed that doing so would best balance the risks to both inflation and the labour market, particularly in light of the prevailing uncertainties, market volatility and market expectations,” it said.
However, the bank said it would continue to place a “somewhat greater-than-usual weight on the flow of data”, while doing what is necessary to return inflation to its 2 to 3 per cent target.
“They [board members] also agreed that, based on the information available at the time of the meeting, it was unlikely that the cash rate target would be reduced in the short term, and that it was not possible to either rule in or rule out future changes in the cash rate target,” the minutes read.
Hauser’s caution
Also this month, deputy governor Andrew Hauser delivered a stark warning about forward guidance at an event, cautioning that overconfident “false prophets” could harm the economy with misguided predictions.
In a speech delivered to the Economic Society of Australia, Hauser said that while public economic debate is “healthy”, the certainty with which some express views on the economy and monetary policy is “less desirable”.
“When the stakes are so high, claiming supreme confidence or certainty over what is an intrinsically uncertain and ambiguous outlook is a dangerous game,” Hauser said.
“At best, it needlessly weaponises an important but difficult process of discovery. At worst, it risks driving poor analysis and decision making that could harm the welfare of all Australians.”
He added that central banks strive to avoid overconfidence – “a universal human failing” – by developing contingent hypotheses about the future instead of relying on overly precise forecasts.
