Reserve Bank of Australia governor Philip Lowe has conceded messaging during the pandemic could have been vaguer and the Reserve Bank may not have been prepared for the increased retail investor audience.
Speaking at a Parliamentary committee on Friday morning reviewing the RBA’s performance, Lowe acknowledged people now relied on the RBA for personal decision making more so than in the past but added that the RBA is only one voice to consider.
“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,” Lowe said. “This was despite our statements on interest rates always being conditional on the state of the economy.”
He added the conditionality about interest rates often got lost in the messaging, acknowledging the community he was communicating with shifted to include more retail investors as opposed to just wholesale and international markets.
Lowe has been heavily criticised for increasing rates earlier than expected when its initial forecast was to keep the cash rate at 0.1 per cent until 2024 when it expected inflation to reach the 2-3 per cent range.
The cash rate had been brought down to ease pressure on the economy during the Covid-19 pandemic.
“People did respond sensibly in taking out fixed rate loans during that period,” Lowe said. “We’ll see the other side of that starting next year when those fixed rate loans roll off. People did no doubt take heed of what we said.”
Leaving home
Recent cash rate rises have created anxiety for those who are likely to come off fixed rate home loans in the near future.
Lowe said in the past less than 10 per cent of new loans were fixed rate, but that jumped to 50 per cent during the pandemic.
“The flow of new loans almost 50 per cent were fixed rate loans and people were taking out two- and three-year fixed rate loans,” Lowe said. “That was partly because of our communication that the fixed rates for three years were low because of our various policy measures.”
A series of decisions saw the cash rate dropped to 0.5 per cent on 4 March 2020 followed by another 25 basis point reduction on 20 March at the start of lockdowns in Australia.
By November, the RBA reduced the cash rate to 0.10 per cent which held steady until this May where it was increased to 0.35 per cent and has a 50 basis point increase every month since then.
Searching for deeper meaning
In hindsight, Lowe said the language the board used in its statements could have been vaguer. “People want clarity so it’s a difficult position. What we can give you is our forecast and reaction function, and you’ll have to make judgements off that.”
Lowe said the underlying message from the reserve bank is that will it aim to do what is best for the community to support the economy.
“We thought interest rates were going to stay low for a long period of time. That hasn’t turned out to be the case because we’ve done well.”
Lowe said he has done some soul searching for forecast misses, but they were not alone in incorrectly forecasting inflation.
“In August last year, most central banks thought that inflation in 2022 would be between 2-2.5 per cent and that was the consensus among the professional forecasting community. Yet in almost country in Europe its 8-11 per cent, in the US it’s 9 per cent, and in Canada it’s 8 per cent. Everyone got this wrong and the reserve bank has got this wrong as well.”
