MNI INTERVIEW: RBA Needs Comms Overhaul Now It Has MPB

The Reserve Bank of Australia needs to overhaul its communications, providing clearer estimates of the neutral rate and more transparent labour market models, to allow markets to better anticipate rate decisions by its new monetary policy board, a former senior official told MNI.

“This is an institution in transition, because they're getting used to the idea that the board have actually got some power,” said John Simon, adjunct fellow at Macquarie University and head of the RBA’s economic research department from 2014 to 2024, following Tuesday’s surprise decision to hold the cash rate at 3.85%. (See MNI RBA WATCH: Board Shocks With Hold As Trade Fears Ease) 

Markets have yet to adjust fully to the new dynamic, in which nine external and internal board members vote on the cash rate and which could sometimes produce different outcomes to RBA staff recommendations, Simon noted. Markets and external economists likely mispriced the chance of a cut due to a combination of confusion over the neutral rate and a lack of familiarity with the board’s voting process and Governor Michele Bullock’s reduced influence, he added. (See MNI POLICY: RBA Trade Concerns Abate, Focus On Domestic Market)

Tuesday’s six-three decision was the first time a split vote had been published in the post-meeting statement. While the RBA still aims for consensus, dissent is now formally recognised, a major change stemming from its 2023 Review. Prior to Bullock’s appointment, past governors had significant sway over interest rate decisions and could more or less dictate their direction.  

Simon said the vote was a positive sign of healthy debate. “The whole point about consensus decision making is it does suppress the minority viewpoints, and while they might be minority today, they are nonetheless going to give you a feeling for where the balance lies, and they may not be minority in future.”

NEED FOR CLARITY

But he criticised recent Statements on Monetary Policy (SoMP), saying they had offered confusing signals, particularly on the neutral rate. The RBA had given the impression it viewed the neutral rate as below 3%, which encouraged markets to price in faster cuts, he argued. (See MNI: RBA Rate Cut Expectations Overblown- Ex-Officials)

“Which certainly the Bank had allowed people to believe, and maybe people had latched on to,” he said. The RBA must overhaul its communications in light of the new structure, particularly to better guide markets, he continued.

Providing a clear neutral rate estimate and transparent unemployment models in official forecasts would be a good starting point, he said, noting past efforts fell short. “They're uncomfortable with the idea of saying anything definitive, so they throw out 500 estimates as a way of saying nothing," he added. “You actually need to make those calls, and you need to put them out there to be held accountable for them and for people to challenge them. But they're still at the stage of hiding behind uncertainty.”

Traders should also recalibrate their expectations, as the RBA prefers to wait for full quarterly inflation data and an updated SoMP before acting, unless prompted by an urgent development. “Every quarter on the CPI release is going to be probably a pretty comfortable schedule for the bank, unless there's some reason they need to be moving more quickly,” he concluded, noting the bank likely had at least one or two cuts to make this year.