‘Dithering’ RBA has lost credibility, market confidence: QIC

The central bank, led by Philip Lowe, has confused credibility with not being wrong and still refuses to admit its mistake, QIC’s chief economist says.

Top economists hit out at the Reserve Bank over its mishandling of monetary policy post-Covid. Picture: Britta Campion/The Australian

Leading economists have lashed the Reserve Bank over its mishandling of monetary policy post-Covid-19, arguing the central bank has lost both its credibility and the confidence of markets by giving mixed messages on rates.

Speaking at an Australian Institute of Superannuation Trustees’ investment conference on Wednesday, QIC chief economist Matthew Peter criticised the central bank over its “appalling communication” on inflation and the need to lift rates higher.

“The last thing we need is dithering, particularly from the monopolist of the money supply that determines our interest rates,” Dr Peter said in a panel discussion on the inflation outlook.

“We can handle it if you get it wrong but what we can’t handle is not being certain about what you think you’re going to do over the next little while. And that’s where the RBA has made a mistake.”

Central bank jawboning was incredibly effective on markets, but only as long as the central bank had credibility, he added.

“At the moment, the Fed still has credibility, in my opinion. The RBA less so, and that’s where the RBA gets itself into a bit of difficulty,” Dr Peter told the conference.

“They got forced out of the zero interest rate decision by the market, they lost their credibility and then they gave really mixed messages on where they were taking interest rates after that.”

IFM Investors chief economist Alex Joiner said the RBA had been “caught short” in “changing its mind” on rates moving upward.

“Phil Lowe on the TV last night was trying to justify higher interest rates but it wasn’t too long ago he was saying rates would be on hold until 2024,” Mr Joiner said.

Other central banks were also slow to shift monetary policy to reflect the inflationary outlook, he noted.

Dr Peter said the RBA governor was still failing to give the market any firm view on the path ahead.

“Instead of saying ‘yes, we’ve got to tighten’, they dilly dallied around. Even now, if you watched the 7.30 report (on Tuesday), what was Phil Lowe even saying? Was he saying ‘yes we’re definitely going to tighten and do whatever it takes’? No.

“The (RBA) have confused credibility with not being wrong. They refuse, even to this point, to admit they made a mistake.”

Financial markets are losing confidence in the RBA, “an institution that spent decades building that confidence up”, he added.

“That’s why the market is now pricing in a 4 per cent terminal rate, the same as the US, even though our inflation rate is probably not going to rise anywhere near as high as the US.”

AustralianSuper chief financial Mark Delaney on Wednesday warned on the outlook for markets in the coming years, predicting lower returns and a more challenging investing environment for the next decade.

“I think returns will be a lot lower, the investing environment will be more difficult and there will be more volatility in the next 10 years or so,” Mr Delaney told The Australian on the sidelines of the conference.

While US markets will be the epicentre of the current “adjustment” in valuations, he expects Australia to fare relatively better.

“The left-behind markets should do much better (than the US). And Australia is one of those left behind markets. So I’m not as pessimistic about Australia as I am about the epicentre being US stocks,” Mr Delaney said.

Mr Delaney also expects a short-term reprieve from the panic selling once the Federal Reserve’s interest rate decision washes out.

“The market’s just had a really big fall — 10 per cent in a matter of days. It’s unlikely it keeps on going straight away. There’s been a panic event since the US inflation report and the Fed meeting is coming up.

“Once we get through the Fed meeting things might stabilise for a little bit before the next inflation read comes through.”

Originally published as ‘Dithering’ RBA has lost credibility, market confidence: QIC