RBA admits faulty rate guidance seen as "broken promise"

Insistence last year that rates wouldn't rise until 2024 has caused it "considerable reputational damage"

RBA admits faulty rate guidance seen as "broken promise"

The Reserve Bank has admitted that hiking rates in May after having spent most of last year insisting that rates wouldn’t rise until 2024 has been interpreted by many as a “broken promise” and caused it “considerable reputational damage.”

In late 2020 and through most of last year, the RBA board repeatedly predicted that rates would not rise from their record low of 0.1% for “at least three years,” or not until “2024 or later.” The so-called “forward guidance” was part of an array of pandemic policies aimed at supporting the economy, The Australian reported.

RBA Governor Philip Lowe’s repeated public assertions that there would be no rate rises in the near future gave many households confidence to take on larger mortgages on the belief that their interest payments would remain low for years. In January 2022, the national average size of a new mortgage peaked at a record $618,000 – 23% higher than two years earlier. The average size of a new mortgage in NSW peaked at $800,000 – a near-30% spike.

The RBA’s report on the forward guidance program, released Tuesday, said “the fact that many people interpreted the forward guidance as ‘a promise’ that there would be no rate rises 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 report said that the central bank “could have done more to emphasise the conditionality of its statements about the future path of the cash rate.”

Brendan Rynne, chief economist for KPMG, told The Australian that he had “some sympathy” for the RBA, which was struggling to communicate with a broader segment of society than usual. Rynne said the central bank usually understood its audience to be other economists, or people “operating with a level of knowledge” about the uncertainty of economic forecasts.

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“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,” Rynne told The Australian.

The report also found that the RBA was too focused on accounting for the most likely outcome and the worst-case scenario, instead of alternative scenarios where inflation rose 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 the upside scenarios when making decisions through this period.”

After a year or more of the central bank predicting no rate rises until 2024, this year’s spiking inflation forced it to hike rates in May, followed by six more rate rises that have pushed the cash rate to a nine-year high of 2.85%. That’s hiked many borrowers’ mortgage repayments by as much as 30% to 40% and driven a major correction in property prices, The Australian reported.

Despite the reputational damage caused by the botched prediction, the RBA said its forward guidance policy had been effective in providing 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.

In comments to a Senate estimates committee, RBA deputy governor Michele Bullock said she had “a lot of sympathy” for households that had taken out large mortgages based on the central bank’s guidance.

“What we were trying to do at the time was give our best guess where inflation was at, but unfortunately we were surprised,” Bullock said.