According to Australia’s central bank, policymakers have maintained the current level of interest rates while they wait for additional information because economic forecasts are extremely uncertain.
Deputy Governor Andrew Hauser of the Reserve Bank of Australia (RBA) stated in a speech in Brisbane that part of the reason inflation had been sticky was that the economy had less spare capacity than previously believed, although estimates were still subject to error.
For this reason, core inflation, which was 3.9% in the June 2024 quarter, was only predicted to moderate back to the target range of 2-3% by the end of 2025, more than a year away, according to the RBA’s most recent projections.
Andrew Hauser pointed out that the enormous range of uncertainty surrounding these forecasts made the assumption change seem insignificant.
“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. 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,” Andrew Hauser stated.
The RBA Deputy Governor also mentioned the possibility that consumption would increase more sharply in reaction to an anticipated rise in household wealth and that unemployment would rise more quickly than anticipated.
Since November 2023, the RBA has maintained its policy steady. It believes that the current cash rate of 4.35%, which was raised from 0.1% during the COVID pandemic, is sufficiently restrictive to bring inflation under control while maintaining employment gains.
Though some analysts felt that rates were already too high, most economists were anticipating a rate cut early in the next year due to the Reserve Bank of Australia’s reluctance to hike further. Having only recently hinted at the possibility of a further hike, markets are now betting on an easing by 2024 end.