MNI BRIEF: RBA Wary Rate Path Could Be Viewed As "Promise"

The Reserve Bank of Australia has expressed concerns that publishing an expected policy rate path could be viewed as a promise, according to information provided to a review into the central bank released Thursday. The 84-page document also outlined the RBA's belief that its 2-3% flexible inflation targeting framework remains "appropriate" and that any changes to the target level could damage long-term credibility if "not done in an appropriate way".

Last week, the RBNZ also said it considered its own inflation target as apprpriate following an internal review (MNI BRIEF: RBNZ Backs Inflation Target In Remit Review).

Responding to the review's request for internal analysis on the case for publishing cash rate forecasts, the RBA said the appropriate cash rate path to use and its communication remain matters of ongoing discussion and review, with "a variety of views" within the Bank. "A drawback of publishing an expected policy rate path is that this could be perceived as a promise rather than depending on how the economy evolves," it said, noting that it does not intend publishing a forecast of the expected path.

The RBA document also showed a 100bps increase in the cash rate was estimated to lower annual GDP growth by about 0.5 to 0.75 percentage points during the following two years, with the peak effect after about one and a half years. Inflation was estimated to fall by a bit under 0.25 percentage points per year over two to three years.