RBA policy path forecasts ‘not for publication’

Criticism of the Reserve Bank of Australia’s (RBA) inflation-curbing strategy via consecutive monthly cash-rate increases since May has impacted the way it will communicate key directives in future.

On Tuesday (15 November), the minutes of the monetary policy meeting of the Reserve Bank board - held on 1 November - were issued, acknowledging the criticism and analysis of the RBA, given its earlier-than-indicted announcement to start hiking up the cash rate.

In response to an RBA-commissioned paper, members reviewed the use of forward guidance — that is, the central bank’s communication of the stance of monetary policy — regarding the cash rate over the COVID-19 pandemic period and discussed the approach to its use in the future.

With pre-pandemic use of forward guidance generally being “qualitative in nature”, but such guidance becoming “more specific and prominent” as part of monetary policy responses during the pandemic, 2022’s increased cash-rate spurt meant guidance had returned to be qualitative, it said.

As the RBA minutes explained: “Members noted that the time-based element of the forward guidance had been prominent in media and market commentary and had come to dominate the interpretation of the Board’s forward guidance.

“As a result, the bank had attracted extensive criticism when the cash rate was increased much earlier than the time-based element of the board’s conditional guidance had suggested.

“The time-based element of forward guidance and the term for the yield target had been mutually reinforcing.

“Members noted that the message about the likely timing of future cash rate increases had been complicated by the yield target.

“The time-based aspect… had not been well suited to the unprecedented global events; moreover, its removal while the yield target remained in place would have significantly affected the credibility of the yield target.

“A greater emphasis on upside risks to the outlook might have led to an earlier decision to modify the time-based element of forward guidance.”

The RBA will ‘learn from this’

According to the RBA, the experience with forward guidance over the pandemic period highlighted the communication challenges in combining state-based and time-based elements in forward guidance, particularly with a yield target.

“The Board is committed to learning from this experience,” it stated.

“Many major advanced economy central banks also experienced communication challenges with the combination of state-based and time-based elements in forward guidance through the pandemic.

“Members noted the public’s interest in understanding the factors that drive the board’s decisions and that this understanding is an important element in ensuring policy effectiveness and accountability.”

Going forward and what’s on the cards

Based on its review, the RBA board has decided its approach to forward guidance will in future be based on the following considerations:

• Where forward guidance is appropriate, ordinarily it will be qualitative in nature. “Given the inherent uncertainty in the world, forward guidance will generally be flexible and conditionality will likely focus on the Board’s policy objectives — namely, inflation and unemployment — rather than the drivers of these variables (e.g. wages). It will typically focus on the short term and be narrative in nature.”
• Forward guidance on interest rates will not always be provided, “although the board will continue to outline how monetary policy settings will be adjusted in response to evolving economic conditions.”
• The board will continue to publish forecasts on a regular basis, along with an assessment of the various risks. However, “the board does not intend to publish its own forecasts of the expected policy path.”
• When policy rates are at, or near, the effective lower bound, a stronger form of forward guidance will be considered, “taking into account lessons on the benefits of flexibility and using scenarios to prepare for a range of possible outcomes.”

The central bank’s members have agreed to publish the review of the RBA’s approach to forward guidance, it had confirmed.

Clarity in word choice when needed

Speaking at the RBA dinner in Hobart after Tuesday’s (1 November) latest cash-rate increase announcement, which took the cash rate to 2.85 per cent, Mr Lowe was clear in outlining that the RBA board was “resolute in its determination” to get inflation to its target rate.

In the context of how long that would take and why, Mr Lowe explained a time frame that Australians (mortgage holders, first home buyers and property investors et al) will have to face “evil” inflation.

“I understand that the higher interest rates that are needed to bring inflation under control are unwelcome by many people, especially those who have borrowed large amounts over recent times,” Mr Lowe said.

“At our [RBA board] meeting, we discussed how the higher interest rates are putting pressure on family budgets, just at the time that high petrol prices and grocery bills are also squeezing budgets.

“We are conscious of this and are certainly taking it into account.”

[Related: Senators grill RBA over inflation-curbing levers]