With similar scenarios playing out around the world,particularly in parts of Europe,it didn’t seem too far-fetched. So,as health authorities scrambled into action,Australia’s top central bankers decided to go hell for leather to do their job to sandbag the Australian economy from the threat of a jobless rate at 15 per cent plus.
In March 2020,the bank unveiled a four-part plan of attack,including a massive program of government bond buying,a facility to give cheap credit to banks,a commitment to keep the yield payable on three-year government bonds at an ultra-low level and,finally,the explicit use of a little known policy tool – at least in an Australian context – of so-called “forward guidance”. Forward guidance is when central banks give explicit guidance on the likely future path of interest rates in a bid to influence lending rates.
Taken together,the measures worked. Borrowing rates plummeted,stimulating credit,boosting demand and ultimately helping to stave off a devastating recession. As it turns out,neither the health nor the economic nightmare scenario played out. But while health authorities have been largely praised for their efforts,the RBA has suffered what it describes as “considerable reputational damage” from that now highly controversial final plank of its emergency plan.
Let’s get one thing clear:governor Philip Lowe never promised rates would not rise until 2024. But you could be forgiven for thinking he did,given media coverage of his remarks,which took his heavily caveated statements and turned them into “no rate rises til 2024”.
Lowe has now apologised to borrowers who took out loans thinking they did have his personal assurance rates would not rise until 2024,admitting:“We weren’t clear enough.” But is Lowe really solely to blame?
The use of such forward guidance is,in fact,an internationally well-established tool of monetary policy,albeit not one Australia has seen before. It can come in various forms,including “state-based” guidance (we’ll increase rates when the economy is in a particular state) and “time-based” guidance (we’ll increase rates at the end of a certain period).