Interest rates could stay higher for longer, economists say, after the Reserve Bank board and Treasurer Jim Chalmers signed a new statement on the conduct of monetary policy.
Several changes to the agreement — traditionally signed at the start of the tenure of a new RBA governor — from its last incarnation have possible ramifications on the outlook for interest rates.
Specifically, the wording around the RBA’s inflation target have changed, with a reference to the 2 to 3 per cent goal being achieved “on average over time” removed. In its place is a commitment for communication when the inflation rate will be substantially away from the midpoint — or 2.5 per cent — of that target.
“The board commits to communicating how long it expects it will be before it again meets its objectives and why,” the agreement states. The RBA has also committed to focus on achieving “sustained full employment”, recognising full employment changes over time and is not directly measurable.
The changes follow the Reserve Bank review, released in April, and the appointment of Michele Bullock as governor, with her tenure beginning in September. Treasurer Jim Chalmers released the new statement on Friday, which also enact other alterations recommended in the review.
HSBC chief economist Paul Bloxham said the RBA had been afforded “maximum flexibility” and the board members would be able to determine how it could weigh the trade-offs between monetary policy, financial stability and full employment.
But he said with other recommendations yet to be implemented, there was further uncertainty for the cash rate into next year — the upshot being the cash rate to be on hold for all of next year, and no cuts until the first three months of 2025.
UBS chief economist George Tharenou agreed the likelihood of pre-emptive cuts next year had now fallen, and tipped November as the earliest time for a cut.
AMP chief economist Shane Oliver said the new statement contained some “big risks”, particularly around the 2.5 per cent inflation mid-point target. He said this was “hawkish” given the RBA now did not see inflation down to 2.9 per cent until the end of 2025.
“Maybe it’s just semantics, but I struggle with the logic behind making this change as the previous approach was worked well,” he said.
The changes also follow the appointment of Bank of England executive Andrew Hauser as deputy governor and former Treasury official Sarah Hunter as chief economist and assistant governor. Both take effect next year.
Among other changes to the bank include unattributed publishing of RBA board votes on cash rate decisions. Others such as the creation of a monetary policy board separate to a governance board are awaiting Parliamentary processes next year.
The RBA board has also committed to greater communication, including each member making one speech or public appearance per year, and publishing more of the information used to support its decisions.
Mr Oliver said the public speeches could lead to confusion as seen with the US Federal Reserve.
“The extra communications from the RBA, including press conferences, risks further adding to the drama and confusion around what the RBA will do, and to the obsession with it, which is not seen in other countries,” he said.