Global: Australia’s Central Bank Highlights Economic Uncertainty and Cautious Policy Forecasting

The Reserve Bank of Australia (RBA) highlighted significant uncertainty in economic forecasts, explaining why policymakers have maintained current interest rates while awaiting further data.

In a speech delivered in Brisbane, RBA Deputy Governor Andrew Hauser acknowledged that inflation has been persistently high, partly due to less available capacity in the economy than initially estimated. However, he noted that these estimates are subject to considerable error.

The RBA’s latest projections indicate that core inflation, which was 3.9% in the June quarter, is expected to return to the target range of 2-3% only by the end of 2025. Despite this adjustment, Hauser emphasized that the shift in assumptions is minimal compared to the broad uncertainty surrounding these forecasts.

“As humans, we are all prone to overconfidence, especially in forecasting the future. Often, the best answer is that we simply do not know,” Hauser remarked. He added that uncertainty might lead to more cautious policymaking, with decisions being delayed or adjusted to avoid exacerbating potential risks.

Hauser also warned of the possibility that unemployment could rise more quickly than anticipated and that consumption might increase more robustly due to expected improvements in household wealth.

Since November, the RBA has kept its policy unchanged, maintaining the current cash rate at 4.35%, a significant rise from the 0.1% during the pandemic. This rate is deemed restrictive enough to steer inflation towards the target while supporting employment.

Although some analysts have suggested that rates should be higher, the RBA’s reluctance to increase rates further has led many economists to anticipate a rate cut early next year, in contrast to other major central banks.

Market expectations have recently shifted towards a potential easing by the end of the year, moving away from earlier concerns about a possible rate hike.

“Be wary of anyone who claims to have a clear solution—such individuals are often misleading,” Hauser cautioned.