RBA in reputation damage control over broken rates ‘promise’

The Reserve Bank has conceded that delivering its first hike in May after having ‘predicted’ rates would stay put until 2024 was seen as a ‘broken promise’.

With RBA governor Philip Lowe publicly making the case for no rate rises for years, some households were emboldened to take on larger mortgages. Picture: Monique Harmer

The Reserve Bank has conceded that delivering its first hike in May after having predicted through most of last year that rates would not rise until 2024 has been seen by Australians as a “broken promise” and caused it “considerable reputational damage”.

The RBA board in late 2020 and through most of 2021 told the country it did not expect rates to rise from their historic low of 0.1 per cent for “at least three years”, or not until “2024 or later”.

The so-called “forward guidance” policy was part of a suite of pandemic-era policy measures aimed at providing maximum support for the economy during the health crisis, and to provide “insurance” against a worst-case outcome.

With RBA governor Philip Lowe publicly making the case for no rate rises for years, some households were emboldened to take on larger mortgages on the understanding their interest payments would remain low for some time. In January 2022, and mere months ahead of the first rate rise, the national average size of a new home loan peaked at a record $618,000 — $113,000, or 23 per cent, higher than two years earlier. The average size of a new mortgage in NSW at the start of this year reached $800,000, against $624,000 in January 2020 — a jump of closer to 30 per cent.

The RBA’s report into the forward guidance program, released on Tuesday, said “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’,” the report said.

The review found that the bank “could have done more to emphasise the conditionality of its statements about the future path of the cash rate” – that is, that the guidance was based on an uncertain prediction for inflation.

KPMG chief economist Brendan Rynne said he had “some sympathy” for the RBA, which had struggled to effectively communicate with a broader cross section of society than usual.

He said the RBA usually understood its audience to be other economists, or people “operating with a level of knowledge” about the inherent uncertainty around forecasts.

“The reality is that when they made that forward guidance through Covid, it was presented through the media as though it was a guaranteed outcome to the general public,” Dr Rynne said.

The RBA report found the central bank was also too focused on accounting for the most likely outcome and the worst-case scenario, rather than alternatives where inflation lifted more quickly than anticipated. “There was no public commentary of what would occur if the upside risks were realised,” the report said.

“During this period, the board was focused on insuring against the worst possible outcomes … in retrospect more attention could have been given to upside scenarios when making decisions through this period.”

Instead of no rate rises until 2024, this year’s inflationary surge — turbocharged by Russia’s invasion of Ukraine — forced the bank to deliver its first rate rise in May, followed by six consecutive rises that have left the key cash rate target at a nine-year high of 2.85 per cent.

This has pushed many borrowers’ repayments up by as much as 30-40 per cent and triggered a major correction in property prices.

Despite the communication issues and reputational damage, the RBA said forward guidance had proved effective in providing further support for the economy.

“Together with other policy measures, the RBA’s stronger forward guidance worked to lower funding costs and support the economy early in the pandemic, when the outlook appeared dire,” the report said.

Jim Chalmers in July announced the first wide-ranging review of the RBA since the start of inflation-targeting in the early 1990s, led by a panel of three independent experts. The review will consider the central bank’s objectives, policy implementation, governance processes and public communications, with a final report and recommendations due by March.

RBA deputy governor Michele Bullock, in comments to a Senate estimates committee, said she had “a lot of sympathy” for households that had made financial decisions based on the bank’s mistaken guidance as recently as late last year that rates would stay low for years. “What we were trying to do at the time was give our best guess where inflation was at, but unfortunately we were surprised,” she said.