Australia’s central bank highlights uncertainty about the economy, Reuters policy forecasts

SYDNEY (Reuters) – Australia’s central bank said on Monday economic forecasts were subject to huge uncertainty, prompting policymakers to keep interest rates on hold pending more data.

Reserve Bank of Australia (RBA) deputy governor Andrew Hauser, in a speech in Brisbane, said inflation was sticky in part because of less spare capacity in the economy than previously thought, although again estimates have been subject to errors.

That’s why the RBA’s latest forecasts showed that core inflation, which was 3.9% in the June quarter, was expected to fall back to the 2-3% target band by the end of 2025, in May more than a year apart.

However, Hauser noted that the change in assumption was small relative to the huge range of uncertainty in these forecasts.

“As humans, we are all prone to overconfidence, especially when forecasting the future. In many cases, the answer we should give is we just don’t know,” Hauser said.

“In some cases, uncertainty can lead you to be less activist — as you wait for more data or try to avoid triggering tail risks through your own actions.”

He added that there was a risk that unemployment would rise faster than expected and that consumption could grow more strongly in response to an expected increase in household wealth.

The RBA has held policy steady since November, believing the current cash rate of 4.35% – up from 0.1% during the pandemic – is tight enough to bring inflation to target while preserving earnings occupation.

Some analysts have argued that rates are not high enough, but the RBA’s reluctance to hike further has most economists looking for a rate cut early next year, following other major central banks.

Markets are now betting on an easing by the end of the year, only recently suggesting that there is a risk of further growth.

“Beware of anyone who claims it is obvious what to do – for they are false prophets!” Hauser said.