Philip Lowe admits the RBA erred on its rate rise timing – but there were messaging misfires too | Peter Hannam

Could Australia’s reserve bank have done a much better job of controlling inflationary expectations?

As fundraisers go, the Reserve Bank of Australia governor, Philip Lowe’s speech on Thursday to the Anika Foundation might not have encouraged a flood of donations.

The annual event, to raise funds for adolescent depression, heard Lowe predict more interest rate rises to come just days after he hiked the central bank’s main interest rate by half a percentage point, in what is already the fastest spate of increases since 1994.

The governor added to a lengthening list of admissions the RBA erred on the timing of when it would start lifting its interest rate.

Back in May, after the bank’s surprise 25-basis point rate hike to start the cycle, Lowe described it as “embarrassing” from a forecasting perspective that it had predicted no rate rises until 2024.

On Thursday, he blamed the misfire on “a very large inflation surprise”, stemming mostly from Russia’s war in Ukraine and the subsequent spike in global energy prices. Inflation is now at its highest level in three decades.

But supply issues, including those from Covid-related disruptions, were only part of the story, Lowe said.

The “very significant” monetary stimulus from the RBA and governments’ fiscal stimulus, along with unemployment rates at their lowest in almost 50 years, meant there was a “significant demand element to the higher inflation”.

“If it was just supply I think we could look through it, but it’s not just supply,” Lowe said, addressing some of the commentary that lifting interest rates would merely harm businesses and households without opening up those supply bottlenecks.

The government and the wider public, though, are not going to merely “look through” the RBA and Lowe’s performance over the past few years.

A rare review of the RBA “to ensure that our monetary policy framework is the best it can be, to make the right calls in the interests of the Australian people and their economy” is now under way and is scheduled to report back with recommendations before the end of March.


The chair of the RBA shadow board reserve – which aims to recommend what the real central bank should do each month, Timo Henckel, who is also a senior lecturer of economics at the Australian National University, said Lowe could do a better job of explaining himself.

“It still feels a little bit like the RBA is trying to guard the secrets of the temple,” Henckel said.

While most people assume the RBA’s only real lever is to lift or lower the cash rate, communication itself can act as an instrument, he said.

“Controlling inflationary expectations is an absolutely crucial part of monetary policy,” Henckel said. “That’s arguably where the RBA did make its biggest mistake.

“They boxed themselves a bit into a corner by stating that they wouldn’t raise interest rates until 2024. Wide sections of the public really interpreted it as a promise and now it looks like they broke that promise and therefore have lost some credibility. So I think that’s certainly criticism that can be laid at their door.”

While Lowe might say, as he did on Thursday, that his stance has been “highly conditional” on inflationary developments, he did not intervene to address that interpretation.

“What central banks haven’t done enough of is to really think through that sender-receiver messaging problem,” Henckel said.

John Hawkins, a former senior official with the RBA and Treasury and now a senior lecturer at the University of Canberra, said that Lowe is only “guilty” of getting a forecast wrong.

Philip Lowe says the RBA had a 'very big inflation surprise'...but they weren't alone.

— Peter Hannam (@p_hannam) September 8, 2022

“If every economist who got a forecast wrong resigned or was dismissed, there would be none left,” Hawkins said.

“He made it clear to anyone who would listen that the cash rate target was data-dependent not time-dependent.”

The RBA has been more responsive than governments, Hawkins said.

“When inflation took off, the monetary policy settings were adjusted much faster than fiscal policy,” he said. “Stimulatory fiscal measures like cutting the petrol excise were still being put in place in March.”

Cue the treasurer, Jim Chalmers, who has ruled out extending the six-month halving of the fuel excise – introduced by the Morrison government to help shore up sagging voter support before the May election – and is fending off other demands for more spending.

“How do we provide cost‑of‑living relief in a responsible way that delivers an economic dividend and doesn’t make life harder for the independent reserve bank as they try to make these decisions about people’s interest rates?” Chalmers asked on RN Breakfast on Thursday.

“The last thing we want to do is provide that cost-of-living relief in a way that’s counterproductive and just costs people more in the end.”

Hawkins saidinterest rates could not remain at their “extraordinarily low” rate of 0.1.%. And at 2.35% after Tuesday’s rate rise, they were lower than might be expected given the inflation rate above 6% and heading towards 8% by year’s end.

And the higher rates are starting to work. Not only are people saving more and borrowing less, the Australian dollar is stronger than it otherwise would be, making imports cheaper. Asset prices – particularly houses – are sliding too and will prompt people to feel less wealthy and pull back on spending, further easing price pressure.

“Even if the initial causes of inflation were external, monetary policy is still effective,” Hawkins said.


Peter Hannam

The GuardianTramp

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