RBA admits failure of interest rate outlook

The Reserve Bank has admitted to having suffered “reputational damage” over its pandemic outlook that interest rates will not rise until 2024, but will not rule out using those specific guidelines again despite the pandemic. burning of families.

The RBA unveiled a review of its COVID policy guidance on Tuesday, after facing massive criticism for raising rates earlier than expected.

The central bank said in 2020 that rates would not rise from record highs until inflation was within its target range, which was not expected until 2024, when wage growth had reached more than 3% per year.

Since then, seven consecutive rate hikes have added hundreds of dollars to monthly mortgage bills, crushing many households who thought earlier RBA advice meant rates would be frozen for several more years.

RBA boss Philip Lowe has previously argued that households have taken the wrong end of the stick, ignoring warnings that rates could rise.

But on Tuesday, the RBA admitted it had “challenges” communicating that view to Australians, vowing to change its guidance in the future.

The bank admitted it had suffered “considerable reputational damage” because people believed it had promised not to raise rates until 2024.

“The forward guidance was based on the state [inflation]but at various times included a time element [2024]“, said the RBA on Tuesday.

“This complicated the Bank’s attempts to communicate the state nature of its policies and it could have done more to emphasize the conditionality of its statements on the future trajectory of the cash rate.”

The RBA says it will avoid making specific statements on the timing of rate increases going forward, although it has not ruled out backtracking on such guidance, saying its 2024 guidance has helped the Australia to tackle COVID.

“Along with other policy measures, the RBA’s stronger forward guidance helped lower funding costs and support the economy at the onset of the pandemic, when the outlook looked dire,” the review said. RBA.

Going forward, the RBA will be more vague on its forward guidance, noting its flexibility and conditionality on inflation and labor market developments. It will focus less on wage growth.

“Forward guidance on interest rates will not always be provided, although the Board will continue to outline how monetary policy settings are adjusted in response to changing economic conditions,” he said.

The review, which is part of a series of pandemic introspections the central bank has conducted over the past six months, comes in the context of an independent review of the RBA that will take into account its guidance on the COVID rate.

On Tuesday, the RBA also released the minutes of its November meeting, revealing that the central bank’s board was once again taken aback by the pace of inflation in the September quarter, necessitating further rate hikes.

The RBA opted for a 0.25 percentage point hike in interest rates in November, but also considered a bigger hike of 0.50 percentage points.

“Given that the cash rate had been increased significantly since May and the full effect of that increase was yet to come, members concluded that the case for increasing the cash rate by 25 basis points when present meeting was the strongest,” the RBA board minutes revealed.

“Recognizing the uncertainty, members did not rule out returning to larger increases should the situation warrant.”

“Conversely, the Council is prepared to keep rates unchanged for some time while it assesses the state of the economy and the outlook for inflation. Interest rates are not on a predefined trajectory.

Leslie M. Gill