Why should we believe the Philip Lowe and the RBA any longer?

The RBA statement accompanying the decision to lift rates to 3.1 per cent this week strongly indicates we should expect more rate rises next year.

It is the first statement on rates since Reserve Bank governor Philip Lowe’s mea culpa some weeks ago around the gross miscalculation he made when he led the market to believe rates would not move higher for two years during the depths of the pandemic.

The problem now for homeowners and investors alike is that we cannot believe much of what the RBA and its governor tell us anymore – what had been the most authoritative voice in the market is now greatly diminished.

If the RBA is offering a forecast on a continued escalation of rates next year then we would be foolish to take it seriously. In 2020 the central bank effectively forecast rates would stay the same for 24 months and it was dramatically incorrect – mortgage rates have soared since that ill fated statement which was repeated ad nauseam at the time.

If it’s not a forecast, but rather a coded message from the bank, then why on earth should we listen since the governor recently told a Senate committee (recalling his pandemic-era statements) “I’m sorry if people listened to what we’d said”.

The kernel of the controversy surrounding that misleading statement on rates is that Lowe did not have to say it.

We need the RBA to do its best to oversee a stable economy. But nobody asked Lowe or his team to conjure up a 24-month outlook for rates and present it with a straight face to a believing public.

Many home loan borrowers are furious with the RBA for misleading them – especially those coming off fixed rates. All borrowers are now facing notifications from the banks month after month telling them their mortgage costs are going up.

Every increase adds to mortgage stress, every notification plays havoc with household budgets not to mention direct debit schedules. Investors are equally at sea because the gap between the clear slowdown in the real world and the overheating economy which concerns the RBA becomes ever more evident.

There are two problems here.

First, Lowe, his board and his team of experts might know more than most about the data in the economy, but they should never front the public with assumptions that could backfire. Even on the modest assumption that rates might move higher in 2023, there are two whole months to go before the RBA board meets again. The investment markets could be turned upside down for better or worse in that period.

On the same basis rates might go up once, or twice more – or they may not go up at all.

Regardless of what the futures market might be signalling, it can be argued there is enough data already to suggest the economy has slowed sufficiently to halt the hikes right here at 3.1 per cent.

Second, the RBA team is delivering too many messages, too often through too many people. The central bank approach of “jawboning” or managing expectations in order to cushion the wider world from unexpected shocks is now ineffective.

If we go back through the recent roll call of RBA governors they have become increasingly garrulous. We could start with Bernie Fraser who was notoriously tight-lipped in office much to the frustration of traders and commentators. Ian Macfarlane presented a more talkative manner, Glenn Stevens then broke the mould with a view that the RBA should be as open as possible.

Admittedly, Lowe inherited this culture. But the bank is now in constant risk of being misinterpreted. Judging the Lowe administration on its ability to move rates at the right time in the right direction it may well score a pass. But ironically, no Martin Place regime has misled the wider public to a greater degree.

The RBA is now at a crossroads. There is a review of the bank due to report in March which will examine all aspects of policy – but the one that matters is this: Can the bank regain the authoritative reputation it had steadily accumulated since its creation in 1960? The way to begin that process is to quit the coded messages, cool off on the forecasting and review “jawboning” … it doesn’t work anymore.