RBA economic forecasts at odds with its guidance on rates: CBA

Ronald Mizen

Economics correspondent

https://www.afr.com/policy/economy/rba-economic-forecasts-at-odds-with-its-guidance-on-rates-cba-20211110-p597s3

 

The Reserve Bank of Australia’s outlook for the economy – and therefore its guidance on interest rates – is inconsistent and should be overhauled, according to Commonwealth Bank economists.

 

RBA governor Philip Lowe last week reiterated the central bank’s view the current record low 0.1 per cent cash rate would remain on hold until 2024, based on its current outlook for wages growth and inflation.

 

But that outlook is based on market pricing, which CBA head of Australian economics Gareth Aird said means the RBA is assuming a situation more hawkish than its softly softly public commentary.

 

In a surprise press conference following the RBA’s November board meeting last week, Dr Lowe labelled market pricing for multiple rate hikes next year “a complete over-reaction” to recent inflation data, though he conceded a situation where interest rates lifted in 2023 was plausible.

 

His rebuke came after a market revolt in the week leading up to the RBA’s monthly board meeting, when investors priced in four rate hikes over 2022.

 

But Mr Aird said the RBA’s position was at odds with the bank’s central economic outlook in its quarterly statement on monetary policy released two days later, which said the bank’s forecasts was “conditioned on a path for the cash rate broadly in line with recent market pricing”.

 

He argued such an assumption led to lower official forecasts for economic growth and inflation over coming years than would otherwise be the case if it assumed the cash rate would remain at 0.1 per cent.

 

It is standard practice for the RBA to use market pricing in its forecasts. However, investor expectations have jumped around markedly in recent weeks, bringing forward expectations for when interest rates would begin to rise from November 2022 to as early as February next year.

 

It is not clear in the statement on monetary policy which pathway the RBA is mapping.

 

If the RBA was using pricing that assumed rates would begin to lift in late 2022, it is possible the economic forecasts would have shifted only marginally from the central case scenario released by the central bank.

 

The RBA wants to see inflation sustainably within its 2 per cent to 3 per cent band before it begins lifting interest rates, and a key sign of sustainability will be wages growth north of 3 per cent.

 

According to the forecasts contained in the statement on monetary policy, the RBA doesn’t expect wages to hit 3 per cent annual growth until December 2023, which supports its 2024 guidance on rates.

 

But Mr Aird said it was flawed to base the forward guidance on a central scenario that assumed rate hikes through the forecast horizon period at the same time as arguing the guidance supported a hold to 2024.

 

“We believe the RBA’s central scenario for the economy should have the underpinning assumption of no change to the cash rate, consistent with their forward guidance, given the RBA is using their central scenario as the basis for their forward guidance on the cash rate,” he said.

 

Mr Aird said while such a change would not hugely influence markets or economists, it would improve the link and transparency between the RBA’s economic forecasts and their forward-based guidance on the cash rate.

 

“Which is very important for a lot of Australian households and businesses,” he said.

 

James Fay Founding Partner T +44(0)20 7422 2978 M +44 (0)7500 988 788 E james.fay@archr.com 49 Carnaby Street, London, W1F 9PY United Kingdom ARCHR.COM

 

 

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