Reserve Bank governor Michele Bullock has warned Australia’s fight with inflation is not yet over, urging borrowers to be patient as the bank works through a challenging period with forecasting and communications.
Speaking in Melbourne this week, Ms Bullock said the RBA’s first cash rate hike in more than two years this month was the result of careful analysis.
It comes on the back of mounting criticism about the board’s mixed messaging in recent months, with its forecasting expectations having U-turned sharply from a rate cut to a rate hike outcome.
“Forecasting is not easy, it is not a science,” Ms Bullock said.
“What you’re doing is summarising the individual decisions of millions of Australians and trying to put them into a single equation, and it doesn’t work like that.”
The bank’s decision to push the rate up 0.25% to 3.85% was widely predicted by markets, with Ms Bullock acknowledging the decision was clear cut and the board meeting’s minutes confirming the decision was unanimous.
The Reserve Bank has been struggling with forecasting. Picture: Getty
“There was the recognition in February that inflation was too high and the forecast was that it wasn’t going to come back into target soon without some action,” she explained.
“We know the data we are getting is from the past, but that’s our starting point and then we have to use what we know to think what will it imply going forward.
“We are not backward looking but forecasting is inherently difficult and we do our best.”
While geopolitical tensions overseas have appeared in plenty of the board’s communications over the last 12 months as a point of concern, Ms Bullock said the board was confident the pressures around inflation are mostly linked to domestic issues.
“The economy is sort of recovering and this is where the judgments are difficult,” she said.
“We don’t have a situation where it’s very clear what we have to do.
"We’ve got ourselves to a position now where things are close to balance, perhaps just a little bit tight, and that’s why people have to be patient.”
Governor Bullock acknowledged the bank “needs to be accountable to the public” but was quick to point the finger at the bank’s critics.
“There are lots of people out there who absolutely know with absolute certainty what we should be doing,” she said. “I never have that degree of certainty, I’m always a little bit doubtful.
The Reserve Bank board says it aims to engage with a variety of views. Picture: John Appleyard.
“There are people out there who do have very firm views. We engage with those views, we debate those views and we turn those views over internally as people would expect us to.”
The ideal situation for the bank would be greater respect for its ability to think thoroughly, she added.
“What I would really like is people to be able to say they don’t necessarily agree with what the [RBA] is saying, but they understand why we are saying it and trust we have done the work we need to be able to understand it.
“Economics is about judgments. Reasonable people can differ as we see every day.”
Ms Bullock says different opinions are welcomed in the bank's thinking. Picture: Christian Gillies
How exactly the bank chooses to communicate to the public has long been a point of interest. Markets rely on the RBA’s tone, wording and signals and borrowers and homeowners are directly affected by what the bank chooses to divuldge.
The RBA is currently in a phase of developing its communication style, moving away from a tactical approach to a more strategic one.
“We are trying to be a lot more strategic with our communications now, identifying areas where we need to communicate more or we need to change our message,” Ms Bullock explained.
“There is layering within those communications, some parts are technical, some parts are simpler.”
Focusing on repeating key messages is central within the approach.
“There is a misconception held by quite a few people that lower inflation means prices will fall,” Ms Bullock said. “Getting this message out that I’ve been repeating and repeating is that we are lowering inflation, but prices are not falling. That just means they aren’t rising as quickly anymore.
“For some people, that is quite a subtle message and they don’t get it, but these are the sorts of things we are trying to double down on.”
The bank’s next cash rate decision will come on 17 March.
This article first appeared on Mortgage Choice and has been republished with permission.
English (US) · 