RBA admits ‘sooner, larger, faster’ communication mistake
Governor Phil Lowe has admitted that the Reserve Bank of Australia (RBA) made mistakes in its expectations that interest rates would be lower for longer.
In a speech to the House of Representatives Standing Committee on Economics, Lowe said the RBA had expected inflation and interest rates would remain low as the result of the long-lasting effect of the COVID-19 pandemic.
However, this proved not to be the case as rates were quickly increased this year from 0.1% in April to 2.35% in September which had prompted many commentators to criticise the RBA for their communication.
“Like the rise in inflation, this increase has come sooner, and has been larger and faster, than was earlier expected. Previously the RBA had forecast that the damaging effects of the pandemic on our economy would be long lasting and that inflation would remain low. On that basis, we had expected that interest rates would remain low for some years.
“I am frequently reminded that many people interpreted our previous communication as a promise, or a commitment, that interest rates wouldn't rise until 2024. This was despite our statements on interest rates always being conditional on the state of the economy. This conditionality often got lost in the messaging.
“We are currently working through the implications of this for our future approach to forward guidance and communication more generally.”
He also acknowledged interest rates and high inflation were “unwelcome” for people as it was putting pressure on household costs and devaluing savings.
“It is a difficult and a concerning time for some people. The alternative, though, of allowing higher inflation to become entrenched would be even more difficult and it would damage our economic prospects.”
However, he countered, many households were benefiting from the strong labour market, were saving at a higher rate than before the pandemic and had built up financial buffers.
AUTHOR
Laura Dew
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