RBA fears loss of trust will make tackling inflation harder

• RBA Deputy Governor Andrew Hauser has given a speech, speaking for the first time since Tuesday’s rate rise.
• He says it is imperative that Australians trust that the RBA is capable of bringing down inflation, otherwise they lose their power.
• Inflation is resulting in rising anger around the world, he said.

The Reserve Bank needs to better explain its decisions to regular Australians, the bank’s second-in-command has said, days after raising interest rates to their highest level in 18 years.

In the first speaking engagement by an RBA official since Tuesday’s decision, deputy governor Andrew Hauser said surveys showed trust in the central bank has remained surprisingly stable, despite rapid tightening in monetary policy in recent years.

But trust is hard won and easily lost, he said on Thursday.

“William McChesney Martin vividly described the central bank as a ‘chaperone who has ordered the punch bowl removed just when the party was really warming up’,” Mr Hauser told an audience at the Australian National University in Canberra.

“Taking away the punch bowl is rarely a way to win instant popularity. The question is whether people can see why the difficult decision is necessary, even when its immediate effects are unwelcome.”

Annual inflation climbed to 4.3 per cent in September and apart for a brief period in early 2025, it has remained above the mid-point of the RBA’s two to three per cent target band since the end of COVID-19.

Australia was not alone in experiencing high inflation, and it was resulting in rising anger around the world, Mr Hauser said.

But safeguarding trust in the RBA is more important than simply maintaining the board members’ popularity among the community.

Trust that the central bank is up to the job and has the public’s best interest at heart is integral to keeping inflation under control.

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Mr Hauser and other top RBA officials have in recent times been banging on about the importance of keeping inflation expectations “anchored”.

The longer inflation remains above target, the greater the risk that households and businesses will lose faith in the RBA’s ability to keep price growth subdued in the long run.

If employers and employees think prices will be significantly higher in a few years’ time, that flows through to what prices businesses decide to set for goods and services, or what pay rises unions ask for.

Longer-term inflation expectations have remained anchored among financial markets, but businesses have increasingly been telling the RBA they are less sure the inflation target will be achieved over the next five to 10 years.

“For a central bank, trust is not a nice-to-have. It’s integral to how monetary policy works,” he said.

“When people trust us to deliver the goals we’ve been asked to pursue, policy is more effective and less costly.”

Mr Hauser argued it was incumbent on the RBA to achieve its policy goals of bringing down inflation as well as better informing the public of why it was causing short-term pain for long-term economic benefit.

-AAP