Don’t hike then hide: clarity demanded on interest rates strategy

Flawed messaging has impaired the RBA’s performance and reputation, according to a landmark review, which calls on the central bank to better explain its actions.

Reserve Bank of Australia governor Philip Lowe on Thursday. Picture: NCA NewsWire / Nikki Short

Flawed messaging has impaired the Reserve Bank’s performance and reputation, according to a landmark review, which calls on the central bank to better explain its actions to financial markets and the public in a new era of candour.

The review found the RBA’s communications were “less transparent than those of some other peer central banks, despite significant advances in recent decades”.

It said explanations of monetary policy strategy lacked important information, and there was limited discussion of the range of views held by board members.

The three-person panel called for a press conference after each board meeting, more details and data about decisions and strategy, clear public statements from external directors, and a new chief communications officer position.

“While the frequency of speeches and parliamentary ­appearances have increased, press conferences are infrequent, explanations of policy strategy lack important detail, and there is limited information available about the range of views within the board,” the review says.

“Accountability mechanisms for external board members, such as an expectation that they should explain the board’s decisions in public, are lacking. More broadly, communication with the public is not as effective as it could be.

“The RBA should better ­explain its policy choices through regular press conferences and ­increasing the amount of information available about policy ­deliberations, strategy and the RBA’s forecasts.

“The RBA’s communications should include the reasoning ­behind decisions, what alternative policy options were considered, and how current policy settings fit into a broader strategy.”

The panel also recommended board papers be published after five years and board members ­occasionally speak publicly about the work of the board.

But RBA governor Philip Lowe pushed back on some aspects, saying on Thursday that while it was possible to have too little communication you could also have too much, which created policy noise and confusion. Dr Lowe said it would take time to find the best balance in an environment where more directors were speaking about key issues.

The review said the RBA’s communications “should focus less on the publicly available facts and more on the reasoning behind monetary policy decisions”.

“The RBA should provide more clarity around why alternative policy options are not pursued, and how current policy settings fit into a broader strategy to achieve its objectives,” it says. The panel criticised the bank’s messaging on its forward guidance on the direction of interest rates during the pandemic, when Dr Lowe said in late 2021 that the 0.1 per cent cash rate target would not rise until 2024 at the earliest.

The RBA started lifting official interest rates in May last year.

While there were “detailed ­caveats” that surrounded that ­advice, the panel said, “they were not well understood by the public”.

“Many people rely on messages they hear from the RBA to guide their decisions because they ­believe the RBA is better placed to make judgments on the economic outlook,” the review says.

“The public can find it difficult to accurately interpret the RBA’s communication. Criticism was particularly focused on the RBA’s use of forward guidance during the Covid-19 pandemic, when the conditionality of the RBA’s statements was not well understood.

“However, it is the judgment of the review that any future use of forward guidance needs to ­account for the strong possibility that messages intended for the public cannot rely on detailed ­caveats given that they may not be well understood.”

In its research, the review said “members of the public expressed a desire for more proactive communication from the RBA”.

Within the financial community, the panel said many people consulted by the review expressed a strong desire for greater transparency around the factors that drive policy decisions. “Many cited the low inflation period between 2016 and 2019 as an example of when the main considerations driving policy decisions were unclear,” the review says.

“Many also highlighted this as a time when greater clarity was needed around how the RBA was managing trade-offs.”