The Reserve Bank has admitted it suffered “reputational damage” over its pandemic outlook that interest rates would not rise until 2024, but will not rule out using such specific guidance again, despite burning families.
The RBA unveiled a review into its COVID policy guidance on Tuesday, after copping massive criticism for raising rates earlier than expected.
The central bank said in 2020 that rates would not rise from record lows until inflation was in its target range. At the time, that wasn’t expected until 2024, when wages growth had picked up to more than 3 per cent annually.
Since then, seven rate hikes in a row have added hundreds of dollars to monthly mortgage bills, squeezing many households who thought the RBA’s earlier advice meant rates would be frozen for several years.
Bank boss Philip Lowe has previously argued households got the wrong end of the stick, failing to take into account caveats that rates could rise.
But on Tuesday the RBA admitted to “challenges” communicating this view to Australians, promising to change its guidance moving forward.
The bank conceded it had suffered “considerable reputational damage” because people believed it had promised not to lift rates until 2024.
“The forward guidance was state-based [inflation], but at various times included a time-based element [2024],” the RBA said on Tuesday.
“This complicated the bank’s attempts to communicate the state-based nature of its policies and it could have done more to emphasise the conditionality of its statements about the future path of the cash rate.”
The RBA said it would avoid making specific statements about the timing of rate increases in future. However, it did not rule out returning to such predictions, saying its 2024 guidance did help Australia weather COVID.
“Together with other policy measures, the RBA’s stronger forward guidance worked to lower funding costs and support the economy early in the pandemic, when the outlook appeared dire,” the RBA review said.
In future, the RBA will be more vague about its forward guidance, noting its flexibility and conditionality around how inflation and the jobs market may change. It will focus less commentary on wages 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 evolving economic conditions,” it said.
The review, one of a series of pandemic introspections the central bank has carried out in the past six months, came against the backdrop of an independent review that is considering the bank’s COVID rates guidance.
On Tuesday the RBA also released minutes from its November meeting, revealing the central bank board was again surprised by the pace of inflation in the September quarter, necessitating further rate increases.
The RBA opted for a 0.25 percentage point increase in interest rates in November. But it also considered a larger 0.50 percentage point hike.
“Given that the cash rate had been increased significantly since May and the full effect of that increase lay ahead, members concluded that the case to increase the cash rate by 25 basis points at the present meeting was the stronger one,” the RBA board minutes revealed.
“Acknowledging the uncertainty, members did not rule out returning to larger increases if the situation warranted.”
“Conversely, the board is prepared to keep rates unchanged for a period while it assesses the state of the economy and the inflation outlook. Interest rates are not on a pre-set path.”
