It put the bank on notice that its actions would be closely scrutinised.
Lessons must be learnt
Chaired by Labor’s Daniel Mulino – who holds a PhD in economics from Yale University – the unanimous cross-party report reflects growing unease among some members of Parliament that interest rate rises are a blunt instrument being deployed in a way that will have limited effect on inflation.
The committee did, however, acknowledge the RBA’s concerns around the risks of inflation expectations moving higher over the medium term, which would flow through to wages and make the task of bringing inflation back to the 2 per cent to 3 per cent target range more difficult.
“The RBA is not solely responsible for bringing down inflation and dampening demand in the economy,” the report said. “The community’s and business sector’s expectations about inflation also influence actual inflation.
“Thus it is vital that the Reserve Bank carefully factors these expectations into both its consideration of rates and its signalling of monetary policy settings to the public.”
In addition to a focus on the effectivity of interest rate rises, the committee said it expected the RBA learn from its past mistakes in forecasting inflation and communicating monetary policy to the public.
“The committee appreciates that several factors influencing inflation could not have been foreseen. It also notes the RBA’s recently released review of forward guidance,” the report said.
“However, the committee expects the RBA to continue to closely examine lessons learnt from its approach to forecasting, its use of modelling, and its approach to communication—and to consider how these can be improved.
“Australian households, workers and industries — facing intensifying cost-of-living pressures and challenging work and business conditions — deserve no less.”
That comment was directed at recent internal review of the bank’s forward guidance which was critical of RBA governor Philip Lowe’s statements as recently as November 2021 that rates would remain on hold until 2024.
This month’s eighth straight increase in the official interest rate took it from an emergency-level low 0.1 per cent to 3.1 per cent in just seven months – the highest in a decade and the fastest tightening cycle in a generation.
“The board expects to increase interest rates further over the period ahead, but it is not on a preset path,” minutes of the bank’s December board meeting released on Tuesday said.
“Members noted that the size and timing of future interest rate increases would continue to be determined by the incoming data and the board’s assessment of the outlook for inflation and the labour market.”
At 3.1 per cent, monthly repayments on a 25-year, $500,000 mortgage will have risen by $834 since May if fully passed through; $1251 for a $750,000 mortgage, and $1668 for a $1 million loan.
Financial markets expect the cash rate to peak around 3.6 per cent next year, which, according to the RBA, would take the portion of household income being spent on mortgage costs back to a record by late next year, as the large bulk of low fixed-rate mortgages expire over the next 12 months.
