Why we got it wrong: economists say the RBA’s guidance led them astray – The Australian Financial Review

Why we got it wrong: economists say the RBA's guidance led them astray - The Australian Financial Review

Mr Evans, who was among those expecting the cash rate to remain unchanged in May, said economists were having difficulty following the RBA’s guidance.

Triggering an increase

”Our assessment of the board’s intentions relied heavily on the guidance from the governor’s recent speech pointing out the importance of the inflation track being consistent with the bank’s forecasts,” he said.

“The March-quarter inflation report indicated that inflation was in line, if not a little better, with that track.”

Mr Evans said the governor’s latest statement suggested the board had given new prominence to the importance of getting inflation back to the 2 per cent to 3 per cent target range within a reasonable time frame.

HSBC chief economist Paul Bloxham said the RBA’s new forecasts, which will be released in full on Friday, included a slightly lower, near-term inflation profile and a slightly weaker, near-term GDP projection.


These changes on their own did not justify the rate rise, he said, and Dr Lowe’s statement on Tuesday did not suggest that any particular economic release during the month was surprising enough to trigger an increase.

“Instead, it seems the board determined that a little bit more tightening would help to reduce the risk that inflation stays high for longer than is tolerable,” Mr Bloxham said.

“That is, [Tuesday’s] move was likely to have been motivated by an assessment of the balance of risks to the forecasts.”

Inflation to linger

RBC chief economist Su-Lin Ong said the RBA may have decided it needed to lower inflation more quickly, with Dr Lowe’s post-meeting statement saying he wanted to get inflation back to the RBA’s 2 per cent-to-3 per cent target range “in a reasonable time frame”.


The RBA does not expect inflation to return to the top of the band until June 2025.

“Mid-2025 may no longer be reasonable, with a more restrictive stance and weaker demand needed,” Ms Ong said. “This underpins the tightening bias and reminder that ‘some further tightening of monetary policy may be required’.”

Like Westpac’s Mr Evans, Ms Ong had also originally expected the RBA to raise rates in May, but scrapped this forecast because of the central bank’s dovish guidance and its decision to hit pause in April.

“We have argued for much of 2023 that policy settings need to be more restrictive to deliver the weakening in demand and the labour market necessary to bring inflation lower,” she said.

“We have also argued that key components of inflation are sticky and likely to remain elevated with more restrictive settings prudent.

“However, the dovish language from the RBA and reluctance to hike further suggested we were probably pretty close to the peak for this cycle.”


Goldman Sachs chief economist Andrew Boak has been forecasting the cash rate to rise to 4.1 per cent since last November, but he was not expecting another cash rate increase until July.

“The RBA attributed the decision to inflation being ‘still too high’ and unit labour costs ‘rising briskly’, though we note that there was no incremental information on unit labour costs in the month and the RBA downgraded its end-2023 inflation forecast to 4.5 per cent from 4.8 per cent,” Mr Boak said.

Skewed balance of risks

He said the board’s decision to raise rates after a one-month pause was surprising given the “weaker” March-quarter inflation figures and the historical precedent for a multi-month pause.

“While it is hard to know at this stage, we suspect fear of spillovers connected to the US banking crisis … and/or considerations around the RBA review may explain the brief pause in April.”

Mr Boak expects a final 0.25 percentage point rate increase in July, which would give the board time to review additional reports on GDP, labour costs and the annual minimum wage review.


“The balance of risks is skewed to a higher terminal rate [than 4.1 per cent], with a material risk of a back-to-back rate increase in June.”

Mr Evans said the next live meeting would be in August, following the release of the June-quarter consumer price index, but he expected the cash rate would be left unchanged.

“By August we expect that the economy, particularly highlighted by the household sector, will be deteriorating. We expect that growth in the second half of 2023 will stagnate.”

Source: afr.com

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