The Reserve Bank boss has apologised to Australians who listened to controversial forecasts during the pandemic and took out mortgages based on expectations interest rates wouldn’t budge until 2024.
RBA Governor Philip Lowe said he was sorry households acted on the forward guidance, noting the bank should have chosen different language to communicate the conditions attached to the predictions.
“I’m sorry that people listened to what we’ve said and acted on that and now find themselves in a position they don’t want to be in,” Dr Lowe told a Senate committee on Monday.
“We didn’t communicate the caveats clearly enough … they didn’t hear the conditionality and that was partly our fault.”
Surging inflation prompted the bank to start lifting interest rates in May.
But Dr Lowe said the country was in a dire situation when the forward guidance was issued, with 15 per cent unemployment predicted as COVID-19 ravaged the economy.
“We wanted to do everything we could, we had a strong insurance mindset,” he said.
He said the massive injection of stimulus to bolster demand had successfully kept the economy afloat but in hindsight admitted the insurance policy was a touch heavy-handed.
Inflation started rising faster than expected, he said, and the continuous COVID-19 waves were hard to predict, with the bank concerned the Omicron wave would spark more lockdowns like the Delta wave.
“If we had known Omicron wasn’t going to be like Delta, we would have considered a different path,” he said.
While Dr Lowe said wage growth of six to seven per cent would make its job of taming inflation harder, he dismissed accusations he did not want to see real wage growth for workers.
He reiterated the preferred wage growth anchor point of 3.5 per cent and, based on current projections for inflation and wages, expects to see real wages growing by 2024.
Productivity was flagged as an essential element of real wages growth, with Australia aligned with the global trend of fairly modest productivity growth of around one per cent.
“Growth in real wages and profits comes down to doing things better,” he said.
The governor also weighed in on the independent review of the central bank, with experts considering the merits of having two separate boards – one that sets interest rates and another that deals with the day-to-day operations of the central bank.
Dr Lowe said the existing board structure had worked well but the dual board model was also effective in other countries.
Under the Reserve Bank Act, the board is responsible for monetary policy and the governor is responsible for the central bank’s operations.
While Dr Lowe did not have a strong view either way, he said the nation would have to wear the “transition costs” of altering the leadership structure of the central bank.
Transition costs would include new laws and communicating the merits of the new model to the public.
“What I know is both models work fine, but to get from one to the other can be problematic,” he said.
However, he told a Senate inquiry if the government decided to draft the Reserve Bank Act today, it would unlikely put a governor in charge of operations with no mention of how the board oversees the governor’s performance.
“That wouldn’t meet the current standards of corporate governance,” he said.
© AAP 2022
