MNI INTERVIEW: RBA Needs More Hawkish Tone - Fmr Research Boss

The Reserve Bank of Australia will need to send stronger signals through its forecasts that it intends to get ahead of inflation this year, in addition to delivering a widely-expected 25-basis-point hike at next week’s meeting, the RBA’s former research chief told MNI, adding that the cash rate may need to rise above 4%.

John Simon, who headed the RBA’s economic research department from 2014 to 2024, said that following Q4’s elevated CPI, the Bank’s reliance on a market-implied cash-rate path as the benchmark for its forecasts leaves it effectively boxed into either hiking next week or accepting worse inflation outcomes in February’s Statement on Monetary Policy.

“I can’t see a world in which just updating the forecasts gets inflation back to 2.5% at the end of the horizon,” Simon said. “That means they’re kind of locked into doing what the market says unless they deliberately choose to get on the front foot.”

Simon argued the RBA has been consistently slow to respond to inflation pressures and now faces a clear choice. “They need to decide whether they’re going to get on the front foot or stay on the back foot,” he said. “If they’ve been sufficiently shocked by the last two quarterly CPI readings, they probably need to go a bit harder than the market to get ahead of inflation. Simply reacting won’t be good enough.”

Simon put an 80% probability on a rate hike from 3.6% next week, above the market’s roughly 70% pricing, following Q4 data that showed trimmed mean inflation rising to 3.4% y/y and December's tightening labour market. 

“They’d need some really strong convictions not to hike,” he said, adding that a single increase would not, on its own, represent a hawkish shift. “If they want to bring inflation back to target sooner than the current two-year horizon, they’ll need to do more than that.”

Simon said recent inflation pressures reflect unresolved post-pandemic dynamics rather than new shocks, including supply-chain reconfiguration, elevated fiscal spending, weak productivity and persistent labour market tightness, a message he has repeated consistently over the past 12 months. (See MNI INTERVIEW: RBA Feb Meeting Live, 4% Rate Over 2026 Eyed)

"The hope earlier this year, that while the U.S. might experience higher inflation, everybody else might get lower inflation, just doesn't seem to be playing out."

RBA CREDIBILITY

Failure to act decisively risks undermining inflation expectations, which underpin the RBA’s relatively optimistic forecasts, Simon warned. “With inflation above target for such a long time, credibility becomes more tenuous,” he said. “Holding rates around 3.85% and hoping inflation grinds lower slowly is a more risky strategy than the narrow path ever was.”

Simon said the policy rate may ultimately need to move above 4%.

“If they genuinely want to knock inflation on its head, history suggests they need to go further than one hike,” he said. “That means four-point-something rather than three-point-something if you want to be on the front foot.”

AUD STRENGTH

On the exchange rate, Simon said the strength of the Australian dollar, which recently broke USD0.70 for the first time since 2023, largely reflects shifting interest rate expectations rather than an independent constraint on policy.

“The exchange rate is responding to expectations of tighter policy,” he said. “You don’t then turn around and say, because the exchange rate moved, we shouldn’t act. You actually have to follow through, or it will move back the other way.”