The Reserve Bank of Australia will no longer publish interest rate forecasts except in “extreme circumstances” after noting the “extensive criticism” it has received over its governor’s mistake.
The central bank on Tuesday released the minutes of its November board meeting and the results of an internal RBA review of its so-called forward guidance during the Covid-19 pandemic.
RBA Gov. Philip Lowe flagged the review in May after admitting the central bank’s pandemic guidance that rates would not rise until 2024 was wrong.
The key interest rate was set at a historic low of 0.10 percent in November 2020 to ease the economic crisis of the Covid 19 pandemic and the associated lockdowns and job losses.
Mr Lowe said late last year that interest rates would remain low into 2024.
He told a parliamentary inquiry in September that he never promised or committed to that timeline, but he accepted that’s how people interpreted his “conditional” statements.
Nonetheless, he has come under criticism for the central bank’s decision to raise interest rates at breakneck speed since May.
The central bank has raised interest rates to discourage consumer spending and bring rising inflation – which hit a 30-year high of 7.3 percent in September – back below the RBA’s 2-3 percent target.
According to the minutes of their Nov. 1 meeting, RBA board members noted that the “time-based element” of the forward guidance had been “outstanding in media and market commentary” and had “the interpretation” of what the bank was “dominating.” had said.
“As a result, the bank had drawn widespread criticism for raising interest rates much earlier than suggested by the time-based element of the board’s conditional guidance,” the minutes read.
“The time-based aspect of the forward guidance was not well suited to the unprecedented global events.”
The RBA Board, following its internal review, has decided that forward guidance on interest rates “is not always provided”.
The RBA will continue to issue “qualitative” guidance, signaling a return to issuing broader, more vague economic forecasts.
The central bank will continue to explain the rationale behind its decisions to alter the monetary policy framework in response to changing economic conditions, such as B. the adjustment of interest rates.
However, the RBA hasn’t ruled out using “strong” forward guidance again if needed.
The central bank found in its internal review that making specific monetary policy predictions in “extreme” economic circumstances, such as those experienced at the height of the pandemic, can provide additional impetus by boosting consumer confidence.
AMP Capital’s chief economist Shane Oliver said the RBA is likely to “release a narrative of how things might play out” going forward, rather than specific interest rate numbers.
Mr Oliver said he thought the media had distorted the RBA’s forecast of interest rates rising no earlier than 2024 by downplaying that the forecast depended on the central bank’s expectations for the economy.
“There’s an old adage economist John Maynard Keynes used to proclaim – when the facts change, I change my mind,” said Mr Oliver.
“The RBA did that. Inflation rose much faster than expected.
“I think they’ve learned a lesson that it’s probably not wise to provide longer-term guidance on interest rate levels.”
The RBA raised interest rates by 0.25 percent to 2.85 percent for the seventh straight month on Nov. 1.
The November adjustment was broadly in line with market expectations, although some economists have suggested a return to a faster pace of tightening as September inflation came in at a higher-than-expected 7.3 percent.
Minutes of RBA board meetings also explain the reasons behind increases or decreases in the cash rate, which is the interest rate charged on overnight interbank loans.
The big banks are generally quick to follow the RBA’s decision and adjust their variable interest rates on loans, including mortgages, based on the monthly cash rate update.
At its Nov. 1 meeting, the RBA board said inflation was still “too high” in Australia and acknowledged that it had grossly underestimated how much inflation would affect the economy.
After reviewing its forecasting models, the board said these models, and those used by other economic forecasters, are not well equipped to deal with large supply shocks and underestimate the impact of global inflation.
The RBA has updated its own forecasts and expects inflation to peak at around 8 percent by the end of the year, higher than the 7.75 percent forecast by the Treasury Department.
Treasurer Jim Chalmers announced in July the first review of the RBA and Australia’s monetary policy arrangements since the 1990s.
The independent review, led by a panel of experts and conducted at arm’s length by the central bank and Treasury, is scheduled to report to the federal government with recommendations by March 2023.
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