The Reserve Bank of Australia’s deputy governor has defended the board’s decision to cut interest rates despite its own staff warning inflation would stay higher in the long term.

In its February Statement on Monetary Policy, RBA economists forecast underlying inflation to remain above the bank’s 2.5 per cent inflation target if it cut the cash rate in line with market expectations.

Andrew Hauser denied claims that the board’s long-awaited decision in February to reduce the cash rate from 4.35 per cent to 4.10 per cent was a rejection of those forecasts.

“Why then did the board cut rates?” he said in an address to the Australian Financial Review Business Summit on Wednesday.

“Did we reject the staff forecasts, as some have claimed? Or did we suddenly and confusingly relax our previously stated intolerance for persistent inflation deviations from target?

“Nothing of the sort – for me at least, the rationale is relatively simple.”

John Simon, a former head of research at the RBA and now a fellow at Macquarie University, was one voice questioning the board’s decision.

“Between November and today the RBA’s expectations are for stronger inflation pressures. And they cut?” he was quoted as saying in the AFR.

“Perhaps there is a disagreement between the RBA staff, who prepare the forecasts, and the RBA board, who make the decision.”

Mr Hauser said the forecast was based on the RBA delivering an additional three cuts over the next 12 months, as the market had been predicting, but the board had no intention to do this.

Markets have since pulled back their rate cut expectations, scared off by a deluge of hawkish commentary since the meeting, and now price in just 60 basis points of additional easing.

That might still be a little too ambitious.

“The rate cut in February reduces the risks of inflation undershooting that midpoint, but the board does not currently share the market’s confidence that a sequence of further cuts will be required,” Mr Hauser said.

As he has done in recent public engagements, Mr Hauser reiterated that the bank had no set path for cutting interest rates.

Instead, the board would make a decision at each meeting based on the data that is available to them.

“Interest rates will go where they need to go to maximise the chances of keeping inflation sustainably in the target band while helping to sustain full employment,” he said.

“Progress towards that target has been good – but it is too soon to declare victory.”

Uncertainty surrounding global trade tensions and the flow-on impacts to economic growth would affect the board’s decision-making, as would its assessment of how tight the labour market is.

Mr Hauser acknowledged its assumptions of how inflationary current unemployment levels were had been challenged by “serious commentators” as being too pessimistic.

But overall, its central projection remained that the labour market would remain relatively tight over the forecast period and a potential driver of inflation.

Jacob Shteyman
(Australian Associated Press)