‘Damaged’ RBA won’t rule out 50bp rate hike

The RBA insists it didn’t break a promise by hiking rates before 2024, blaming ‘complex’ messaging for the reputational damage.

The Reserve Bank of Australia says it has suffered “considerable reputational damage” over misplaced views that it broke a pandemic promise by raising interest rates before 2024.

The bank, which on Tuesday would not rule out future 50-basis-point hikes, has reviewed its messaging issued at the height of the Covid-19 pandemic amid criticism it had misled mortgage holders about the pace of rate rises.

An internal review of its pandemic guidance found the central bank’s “overly complex” messaging led people to believe there would be no rate rises before 2024.

In February 2021, with rates at record lows, the RBA said it would not increase the cash rate until inflation is within the 2-3 per cent range – which was not expected “to be met until 2024 at the earliest”.

Repetition of the forecast, particularly the year “2024”, reinforced a misinterpretation rates would stay low for several years, the RBA noted.

“It was often interpreted that the RBA had promised that interest rates would not increase until 2024, with the statements about conditionality being downplayed,” the review noted.

“The fact that many people interpreted the forward guidance as ‘a promise’ that there would be no rate raises until 2024 led to considerable reputational damage to the bank.

“When the cash rate was increased in May 2022, many people saw the bank as having broken its promise.”

Governor Philip Lowe inside the Reserve Bank of Australia's main board room in Sydney. The RBA blames complex messaging for criticism it broke a promise. Picture: Richard Dobson

At its April board meeting the RBA noted recent developments in relation to inflation – notably surging energy and commodity prices brought on by Russia’s invasion of Ukraine – had “brought forward the likely timing of the first increase in interest rates”.

Mortgage holders have suffered seven consecutive rate rises since the RBA’s first hike in May, and more pain is likely.

At its November 1 meeting RBA board members considered a 25 bps or 50 bps increase, but chose the smaller rise after determining “that acting consistently would support confidence in the monetary policy framework among financial market participants and the community more broadly”.

“The arguments for a 25 bps increase rested largely on the fact that the cash rate had been increased materially in a short period of time and that there were lags in the operation of policy,” the minutes noted.

However, future 50 bps rises could lie ahead as the RBA board reaffirmed the importance of returning inflation to target and “expects to increase interest rates further over the period ahead in its effort to establish a more sustainable balance of demand and supply in the Australian economy”.

It said the size and timing of future interest rate increases would be determined by incoming data and the board’s assessment of the outlook for inflation and the labour market.

“The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome,” the minutes said.

Originally published as ‘Damaged’ RBA won’t rule out 50bp rate hike