The central bank on Tuesday released the minutes from its November board meeting, which examined the findings of an internal RBA review of its so-called forward guidance during the Covid-19 pandemic.
RBA governor Philip Lowe had flagged the review in May after he admitted the central bank’s pandemic guidance that interest rates would not rise until 2024 was a mistake.
The cash rate had been set at a historic low of 0.10 per cent in November 2020 in a bid to ease the economic crunch of the Covid-19 pandemic and associated lockdowns and job losses.
Mr Lowe said late last year that rates would remain low until 2024.
He told a parliamentary inquiry in September that he had never promised or committed to that timeline, but he accepted people interpreted his “conditional” statements to mean that.
Nevertheless, he has copped criticism over the central bank’s decision to hike interest rates at breakneck speed since May.
According to the minutes from their meeting on November 1, the RBA’s board members noted the “time-based element” of the forward guidance had been “prominent in media and market commentary” and had come to “dominate the interpretation” of what the bank had said.
“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 minutes read.
“The time-based aspect of the forward guidance had not been well suited to the unprecedented global events.”
The RBA board has decided following its internal review that forward guidance on interest rates “will not always be provided”.
But the central bank says it will continue to publish broader economic forecasts and “qualitative” guidance regularly.
And the RBA will outline how it will shift monetary policy settings – such as adjusting interest rates – in response to changing economic conditions.
The minutes from the RBA board’s meetings also explain its reasoning for raising or dropping the cash rate – moves lenders are usually quick to follow.
The RBA hiked the cash rate for a seventh consecutive month on November 1 by 0.25 per cent to 2.85 per cent.
The bank has been lifting interest rates in a bid to discourage consumer spending and rein in inflation, which is at a 30-year high in Australia.
This month’s adjustment was generally in line with market expectations, although some economists were tipping a return to a faster pace of tightening, given inflation in September was higher than expected at 7.3 per cent.
At their meeting on November 1, the RBA board acknowledged it had significantly 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 weren’t well equipped to deal with large supply shocks and underestimated the effects of global inflation.
The Reserve Bank has updated its own forecasts to expect inflation to peak at about 8 per cent by the end of the year, higher than the 7.75 per cent forecast by Treasury.
Mr Lowe said earlier this month that inflation was still “too high” in Australia.
“The board expects to increase interest rates further over the period ahead,” he said at the time.
More to come
Read related topics:Reserve Bank
RBA’s radio silence on interest rates
The Reserve Bank of Australia is likely to stop disclosing its predictions for future interest rates after noting the “extensive criticism” it received over its governor’s error.
The central bank on Tuesday released the minutes from its November board meeting, which examined the findings of an internal RBA review of its so-called forward guidance during the Covid-19 pandemic.
RBA governor Philip Lowe had flagged the review in May after he admitted the central bank’s pandemic guidance that interest rates would not rise until 2024 was a mistake.
The cash rate had been set at a historic low of 0.10 per cent in November 2020 in a bid to ease the economic crunch of the Covid-19 pandemic and associated lockdowns and job losses.
Mr Lowe said late last year that rates would remain low until 2024.
He told a parliamentary inquiry in September that he had never promised or committed to that timeline, but he accepted people interpreted his “conditional” statements to mean that.
Nevertheless, he has copped criticism over the central bank’s decision to hike interest rates at breakneck speed since May.
According to the minutes from their meeting on November 1, the RBA’s board members noted the “time-based element” of the forward guidance had been “prominent in media and market commentary” and had come to “dominate the interpretation” of what the bank had said.
“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 minutes read.
“The time-based aspect of the forward guidance had not been well suited to the unprecedented global events.”
The RBA board has decided following its internal review that forward guidance on interest rates “will not always be provided”.
But the central bank says it will continue to publish broader economic forecasts and “qualitative” guidance regularly.
And the RBA will outline how it will shift monetary policy settings – such as adjusting interest rates – in response to changing economic conditions.
The minutes from the RBA board’s meetings also explain its reasoning for raising or dropping the cash rate – moves lenders are usually quick to follow.
The RBA hiked the cash rate for a seventh consecutive month on November 1 by 0.25 per cent to 2.85 per cent.
The bank has been lifting interest rates in a bid to discourage consumer spending and rein in inflation, which is at a 30-year high in Australia.
This month’s adjustment was generally in line with market expectations, although some economists were tipping a return to a faster pace of tightening, given inflation in September was higher than expected at 7.3 per cent.
At their meeting on November 1, the RBA board acknowledged it had significantly 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 weren’t well equipped to deal with large supply shocks and underestimated the effects of global inflation.
The Reserve Bank has updated its own forecasts to expect inflation to peak at about 8 per cent by the end of the year, higher than the 7.75 per cent forecast by Treasury.
Mr Lowe said earlier this month that inflation was still “too high” in Australia.
“The board expects to increase interest rates further over the period ahead,” he said at the time.
More to come
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