This article is from the Australian Property Journal archive
THE Reserve Bank of Australia was “caught by surprise” by the strength of inflation at home and abroad, according to its deputy governor Michelle Bullock, who was grilled by a Senate estimates committee on its 2020 guidance that interest rates would stay at their record low for four years.
Multiple statements from the RBA in 2020 said interest rates – at the time sitting at an unprecedented 0.1% – would be unlikely to go up until 2024. But a surge in inflation to its current level of 7.3% has prompted seven consecutive rate hikes by the RBA, including last week’s bump up to 2.85%.
In the Senate estimates, Greens senator Nick McKim said the 2020 statements were “misleading” and asked Bullock what the RBA would say Australians struggling with mortgages now that interest rates had lifted by 2.75% since April.
“What we were trying to do at the time was giving our best guess of where we thought inflation was at. And unfortunately we were surprised,” Bullock said.
“Obviously, I have a lot of sympathy for people who undertook particular transactions, thinking that that was what was going to happen.”
“But we were caught by surprise. Other countries were caught by surprise by the strength of inflation. And under the circumstances, we had no choice but to start raising interest rates.”
Aussies are expected to pay an extra $815 a month – or $10,000 a year – for a $500,000-plus mortgage. The RBA is expecting inflation to slow from “around 8%” by the end of this year to 4.75% by the end of 2023 and to slightly above 3% by end-2024. The ANZ yesterday reaffirmed its forecast that interest rates would hit a top of 3.85% in the middle of next year.
The RBA board said last week it is focused on “keeping the economy on an even keel” as it looks “to return inflation to the 2-3% range over time”, which Bullock reiterated on Wednesday night at the Australian Business Economists dinner in Sydney.
“It’s not quite there in the forecast period. But if we went a bit further out, we’re expecting that it will come back down within target. It’s just not within the forecast horizon that we’ve currently published,” she said.
“The unemployment rate will have to rise, the economy does have to slow, but we think that we can hopefully bring the inflation rate back down to that target band. (It) might take a little bit longer, but we can preserve some of those gains for employment that we’ve achieved over the last few years.”
Bullock said yesterday, “In many ways, the fact that we had to increase interest rates was a measure of success for policy and delivered growth,” in reference to the RBA bringing down interest rates to 0.1% as the pandemic gripped the world.
She said she didn’t think the 2020 claims were “misleading”.
“The information was delivered when we had certain information available to us, which was, as I said, a very dire state for the economy.
“We were taking out insurance against some very bad outcomes. And our best estimates of the time our best forecasts were that inflation was not going to be rising any time soon.
“As I said, we were caught by surprise as was everyone.”
