MNI: RBA To Look At Cash Rate Signalling Methods

The Reserve Bank of Australia is likely to introduce some form of forward guidance or stronger signalling in the second half of the year to reduce the risk that markets misinterpret its intended path for the cash rate, former officials told MNI.

The Bank could encourage more board members to speak publicly on macroeconomic issues or expand its scenario analysis in official forecasts. While it is unlikely to adopt a U.S. Federal Reserve-style dot plot, recent market reactions suggest the RBA must offer greater clarity on its institutional stance, the ex-officials said.

Warwick McKibbin, a former board member from 2001 to 2011, argued the RBA should build on the scenario analysis introduced in the May Statement on Monetary Policy. “If you have a proper model, you can provide information to the market – if this happens, here’s how we’ll respond,” he said.

Deputy Governor Andrew Hauser has advocated for deeper scenario work since joining from the Bank of England last year, developing models to explore issues such as the neutral interest rate.

McKibbin said scenario analysis requires a clear and coherent understanding of the economic outlook – something he argued the Bank has not yet sufficiently provided. The Bank’s recent model adoption, which incorporates some of his own work, may allow it to move beyond its current reluctance to offer explicit guidance, he added.

James Morley, professor of macroeconomics at the University of Sydney, said the RBA is likely to be sensitive to criticism after its surprise decision to pause the cash rate in July, and could push board members to deliver presentations as soon as the August or September meetings. (See MNI RBA WATCH: Board Shocks With Hold As Trade Fears Ease)

“That’s how the Federal Reserve system tends to operate,” he said. “But there are limits to what the RBA can do because of the nature of the board and its external members, which restrict how much can be communicated before policy meetings.”

Governor Michele Bullock highlighted the challenge of providing guidance following the July decision to hold rates steady at 3.85%, noting that the board’s new voting structure made consensus harder to signal. Prior to 2023's RBA Review, the Governor’s view largely drove outcomes and messaging.

“There’s now a question of how they’ll communicate if their expectations of the cash rate differ from what markets have priced,” Morley said. The RBA should consider publishing independent cash rate forecasts, like Sweden’s Riksbank, and abandon the practice of basing projections on market-implied rates, he argued.

“The RBA will be reluctant, fearing it would be seen as too much forward guidance,” he said. “But if they have a different outlook from markets – and one they want to use in internal modelling –they may want to start communicating that path more explicitly.”

McKibbin agreed that relying on market-implied rate paths creates confusion. “I don’t understand why you’d base policy decisions on a forecast you think is incorrect, but that’s what we see from the Bank right now,” he said.

REFORM RELUCTANCE

Martin Eftimoski, an RBA economist from 2017 to 2021, said the Bank has historically been slow to reform and would move cautiously on steps toward greater transparency. A Fed-style dot plot could help communicate the Board’s view, he said, but the RBA is more likely to stick to a few speeches from individual board members.

“The biggest problem is the Bank’s failure to understand how ordinary people interpret data,” he continued, adding that the RBA drew the wrong lesson from former Governor Philip Lowe’s pandemic-era guidance that interest rates would remain low until mid-2024. “The right takeaway would be to improve how they communicate. The wrong one is to avoid guidance altogether. My suspicion is the Bank chose the latter.”