Australia’s Central Bank Highlights Economic Uncertainty and Challenges in Policy Forecasting

On Monday, Australia’s central bank underscored the significant uncertainty surrounding economic forecasts, explaining why it has chosen to keep interest rates unchanged while awaiting more data. Reserve Bank of Australia (RBA) Deputy Governor Andrew Hauser, speaking in Brisbane, addressed the complexities and challenges of predicting future economic conditions.
Hauser pointed out that inflation has remained stubbornly high, partly due to lower-than-expected spare capacity in the economy. Despite this, the RBA’s latest projections indicate that core inflation, which stood at 3.9% in the June quarter, is not expected to return to the target band of 2-3% until the end of 2025—a delay of over a year.
He acknowledged that the minor adjustment in forecasts does not fully capture the broad range of uncertainty. “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 remarked.
Hauser also noted the potential risks of rising unemployment and stronger-than-expected consumer spending in response to increased household wealth. This uncertainty has led the RBA to adopt a cautious approach, avoiding further rate hikes and awaiting additional economic data before making further policy decisions.
The RBA has maintained its current cash rate at 4.35% since November, up from the pandemic low of 0.1%. This rate is deemed restrictive enough to help achieve inflation targets while supporting employment. Despite some analysts suggesting that the rate may not be high enough, the RBA’s reluctance to raise rates further has led many economists to anticipate a possible rate cut early next year, trailing behind other major central banks.
Markets are now predicting an easing of rates by the end of the year, reversing earlier expectations of a potential hike. Hauser warned against overconfidence in economic predictions, stating, “Beware anyone who claims it is obvious what to do – for they are false prophets!”
The RBA’s approach reflects the ongoing complexities in navigating economic policy amid a landscape of considerable uncertainty.