Australia’s central bank underlines uncertainty about economy, policy forecasting

AUSTRALIA’S central bank said on Monday economic forecasts were subject to huge uncertainty, one reason that policymakers have stayed the course on interest rates while waiting for more data.

Reserve Bank of Australia (RBA) Deputy Governor Andrew Hauser, in a speech in Brisbane, said inflation had been sticky in part due to there being less spare capacity in the economy than previously thought, though again estimates were subject to error.

That was why the RBA’s latest forecasts showed core inflation, which ran at 3.9 per cent in the June quarter, was only expected to ease back to the target band of 2-3 per cent by the end of 2025, more than a year away.

However, Hauser noted that the change in the assumption was tiny relative to the huge range of uncertainty over these forecasts.

“As humans, we are all prone to overconfidence, particularly when forecasting the future. In many cases, the answer we ought to give is that we simply do not know,” Hauser said.

“In some cases, uncertainty may induce you to be less activist – as you wait for more data, or try to avoid triggering tail risks through your own actions.”

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He added there was a risk that unemployment could rise faster than expected and that consumption could pick up more strongly in response to an expected increase in household wealth.

The RBA has held its policy steady since November, judging the current cash rate of 4.35 per cent - up from the 0.1 per cent during the pandemic - is restrictive enough to bring inflation to target while preserving employment gains.

Some analysts had argued that rates were not high enough, but the reluctance from the RBA to hike further had most economists looking for a rate cut early next year, trailing other major central banks.

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Markets are now wagering on an easing by the year-end, having only recently implied there was a risk of a further hike.

“Beware anyone who claims it is obvious what to do – for they are false prophets!” Hauser said. REUTERS