For more than a year, the Reserve Bank has repeatedly repeated a crucial assertion. Now it has turned around – and left countless Australians out in the cold.
For months, the message from the Reserve Bank of Australia was clear: interest rates would not rise until 2024.
This message was repeated over and over again from late 2020 and throughout 2021 as Australia dealt with the devastating Covid pandemic.
In fact, for most of last year, the RBA issued the same repeated assurance: “The Board will not raise the cash rate until real inflation is sustainably within the target range of 2 at 3%. For this to happen, wage growth will need to be significantly higher than it is now. This will require significant employment gains and a return to a tight labor market. The Council does not expect these conditions to be met before 2024 at the earliest.
Deliver more live and on-demand financial news with Flash. More than 25 news channels in one place. New to Flash? Try 1 month free. Offer ends October 31, 2022 >
Countless Australians have taken out mortgages during this period, at a time when house prices, and therefore mortgages, have never been so expensive, with many taking these crucial four words – “2024 at the earliest – into consideration when making such an important life decision. .
Then, in May this year, disaster struck when the RBA announced the first official interest rate hike since 2010, raising the cash rate by 25 basis points to 0.35%.
A month later, the RBA sucker hit homeowners again with an “oversized” 50bp rate hike, followed by another 50bps double whammy this week, the cash rate now standing at 1.35%.
And that left a lot of Australians very angry.
Many mortgage holders – especially young Australians who have been buying in the country’s reputable property market over the last 12 or so months – have felt betrayed by the RBA over what they perceive as a broken promise. .
But is this accusation correct?
RBA Governor Philip Lowe – who earlier this year admitted he had no mortgage and is on a staggering base salary of $911,728 – told the 7.30am ABC on last month that it was never a promise at all.
“Sometimes my comments are interpreted as if I had made a promise, or a very strong statement, interest rates would remain where they were until 2024. In our own communication, our own thinking was largely part a conditional statement,” he said.
Economist Chris Richardson told news.com.au that younger and less well-off Australians would be disproportionately hit by the RBA’s aggressive and earlier-than-expected rate hikes, but said that if the Board were to improve his communication game, few could have foreseen the chain of global events that triggered the latest misfortunes.
“To be clear, I’ve been thinking similar things (to the RBA) about where interest rates would and should go, and if people are wondering why the Reserve Bank’s huge shift in gears, it’s because things have happened,” he said. said.
These “stuff” – the war in Ukraine, the floods in Australia and the current Covid restrictions in China – have severely affected supply chains, driving up prices and accelerating inflation.
“The Reserve Bank thought interest rates would be rising slowly and not anytime soon, but those three things happened, and the last thing was Australia’s economic recovery was even better than expected, with a rate unemployment at its lowest level in half a century.
“That’s a good thing, but it also gives us some inflation, and all of these things to a greater or lesser extent were unexpected by the RBA. »
Fellow economist Saul Eslake agreed it was not fair to criticize the RBA for being too cautious at the start of the pandemic because no one knew how bad things could get – but said the biggest mistake the Reserve Bank was not reacting quickly enough once things got started. to improve.
“The RBA can be criticized for setting monetary policy for a depression-like scenario, which was the right thing to do, but it kept those parameters at those levels long after the need for them had passed,” he said. -he declares.
In fact, the RBA was one of the last central banks to start raising rates again – and in another major mistake, it was the only one to set a date when they would rise again.
“Most said they would keep rates low for a long time, or until a target is reached, but no other central bank in the world has set a date,” Eslake said.
“While Philip Lowe would say it was always conditional, the reality is that it was fine print that no one reads more than they read product disclosure statements.
“And even after the RBA dropped the 2024 benchmark, which it did in November last year, they kept saying it would be a long time (before rates were raised). »
Mr Eslake said the RBA was now raising rates aggressively because it had “a lot of catching up to do” to bring it up to par with the rest of the world.
And Mr Richardson said communication from the RBA had also been sorely lacking at a time when it was never more important to keep the country informed.
“While Australians have never borrowed so much and the RBA’s decisions have never mattered so much to us, it’s important that they treat us like adults who are part of the conversation,” he said. -he declares.
“The RBA likes to be inscrutable…but that’s just not enough, they need to be clear.
“I have no problem with them changing their minds – if they trust us now and tell us what happens and what happens next and if it turns out to be wrong in the end, that’s fine. , but they have to keep explaining.”
Mr Richardson said the RBA’s lack of communication had spooked households.
“We’re still spending a storm and interest rates haven’t started to have a big impact on the economy yet, but various measures of consumer sentiment show we’re almost as worried now as we were. any time since the first hit of Covid,” he said.
“It’s not good enough, and families need not be as worried as the Reserve Bank made them. »
Read related topics:reserve bank