MNI BRIEF: RBA Must Learn Forecasting Lessons - Committee

The Reserve Bank of Australia must learn from its failure to forecast a surge in inflation, said a review of the central bank's annual report by the House of Representatives economics committee released Thursday.

While acknowledging several factors influencing inflation that could not have been foreseen, the committee said the RBA needed to learn from its inability to predict and act earlier on resurgent price pressures. "The committee expects the RBA to continue to closely examine lessons learnt from its approach to forecasting, its use of modelling, and its approach to communication—and to consider how these can be improved," the report said. The RBA expects inflation to peak around 8% this quarter.

RBA Governor Philip Lowe acknowledged the bank's failure to identify the risk of inflation in September, labelling it a "very large forecast miss". The RBA has endured a bruising 13 months since abandoning its yield curve control policy in November 2021, which upset mortgage borrowers who believed interest rates would be held at 0.1% until 2024.

The Bank is currently the subject of a Treasury-backed review of its forecasting, policy implementation and communications. A final report will be handed to the government in March. An update by the review panel in November said most respondents to the review thought the 2-3% inflation target was "about right". (See MNI BRIEF: RBA Inflation Target 'About Right' - Review Panel)