Were Reserve Bank board members conscious of what they were doing when they elevated internal staff economic forecasts to the status of monetary policy?
will now be buried towards the bottom of the central bank’s monetary tool box, with a note warning that it should only be employed in extreme emergencies.
In the first place, it was an extremely cost-effective way of pushing borrowing costs for households and businesses lower. Indeed, the Reserve Bank only spent a very modest $36 billion buying government bonds to support the yield target. As the Reserve Bank now concedes, “the exit in late 2021 was disorderly and associated with bond market volatility and some dislocation in the market”.But the whole exercise exposed a flaw in contingency planning. The Reserve Bank board was so wedded to the view that interest rates would remain ultra-low that it failed to prepare for the possibility of a very different outcome.
The distinction, however, becomes blurred when the Reserve Bank board elevates internal forecasts to the point where they become an instrument of monetary policy. As happened in early 2021.
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