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RBA governor Philip Lowe on several occasions through 2021 said interest rates were likely to stay at record lows until 2024. A review of the policy shows people believed the bank broke a promise by not keeping to the 2024 timeline.Credit:Alex Ellinghausen

During the depths of the COVID-19 pandemic,many central banks committed to holding interest rates at extremely low levels. The RBA said in February 2021,with the cash rate at 0.1 per cent,it did not expect rates would need to be increased “until 2024 at the earliest”.

As late as November last year,when financial markets and some economists were predicting the bank would soon have to lift rates,the RBA was maintaining no interest rate changes were likely until 2024.

But in early May,it lifted the cash rate by a quarter of a percentage point,catching many borrowers by surprise. It has since taken the cash rate to 2.85 per cent,with economists and markets expecting another increase at the RBA’s December meeting.

The review,carried out by RBA staff,found the original guidance of keeping rates steady until 2024 helped to increase confidence among Australians while providing “insurance” against the poor economic outlook at the time.

That initial benefit,however,became problematic as Australians believed the RBA had promised not to change rate settings.

“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,” it found.

“When the cash rate was increased in May 2022,many people saw the bank as having broken ‘its promise’.”

While conceding its commentary was not well understood and ultimately “proved incorrect”,the review found that if interest rates were again pushed almost to zero it would consider using forward guidance,albeit with caveats. But it would be unlikely to provide such a long outlook for rate settings.

The RBA linked wages growth to hitting its inflation target. A review suggests the two issues should have been separated.Credit:James Davies

The review also noted the bank’s statements linking wages growth to inflation had caused problems.

The bank had said it was looking for wages growth to accelerate as a sign that inflation was getting back into its 2 to 3 per cent inflation target.

But the review found this meant other inflationary pressures,such as domestic demand,were not given as much importance by financial markets and outside economists.

“This focus on wages could have also down-weighted other important factors that can drive inflation,” it found.

The extent and pace of inflation dominated the RBA’s November meeting,at which it lifted interest rates by a quarter of a percentage point.

Minutes of that meeting show the bank board,which had lifted rates by half a percentage point in June,July,August and September,contemplated a similar-sized increase.

The minutes show RBA board members are increasingly aware of the financial pressure high inflation and increased interest rates are putting on households.

“While consumption had held up so far,the higher interest rates and high inflation were putting pressure on household budgets at a time when housing prices were also falling. The full effects of higher interest rates were yet to be felt in mortgage payments,” they showed.

“The tightening of monetary policy was having a clear effect on the housing market,where prices had declined after earlier large increases and the demand for housing loans had fallen.”

On Wednesday,the latest wage price index data will be released and is expected to show a lift of about 0.9 per cent through the September quarter. That would take annual wage growth to about 3 per cent,the highest rate since 2013 but still well short of inflation.

Commonwealth Bank’s head of Australian economics,Gareth Aird,said the wages data coupled with job figures due on Thursday could force the bank to keep rates on hold at its meeting next month.

“Given the RBA has flagged the idea of pausing in the tightening cycle,a rate hike in December is not a done deal,particularly if the data over the next two days comes in softer than anticipated,” he said.

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