Trust in the Reserve Bank is under strain, RBA deputy governor concedes

Reserve Bank deputy governor Andrew Hauser has acknowledged that Australians are losing confidence in the RBA's ability to bring inflation down as planned in the next 12 months.He says an RBA survey has found trust in the central bank's near-term ability to achieve its monetary policy objectives has "fallen materially" recently, even though overall trust in the RBA remains high and stable.He says the RBA does not want the public to lose trust in the RBA as an institution, but economic developments are putting that trust "to the test"."Not all the news is bad," he said."But inflation is another story. It's been above central bank targets for years. "And around the world, that's causing increasing anger. "Consumer confidence is exceptionally weak. And households rank inflation as their number one economic concern."The cumulative increase in prices since COVID has far exceeded that in any other tightening period since inflation targeting began."A lower inflation rate doesn't undo that accumulated increase. And it's that increase, not just the latest rate of change, that seems to be part of what's driving public anger."What impact has this had on public trust in central banks?" he asked.Overall trust is high, but the edges are frayingMr Hauser made his prepared comments when delivering the Sir Leslie Melville Lecture at the Australian National University on Thursday evening. The title of his speech was Trust, Expectations and Monetary Policy."Just as we need it most, trust is under strain," RBA deputy governor Andrew Hauser has warned. (Supplied)In his lecture, he said the RBA had been running a new Community Research Survey, which began in February last year.The survey has now had four separate waves, drawn on feedback from 12,000 Australians, across all parts of the country. The latest survey was in September.He said the survey showed that around 55 per cent of respondents have 'high' or 'moderately high' trust in the RBA."That puts us in the upper part of the distribution of Australian public institutions," he said."Other central banks using comparable methodologies have similar scores."Strikingly, our overall trust measure has been broadly stable, or even slightly up, over the past 18 months. That's a welcome, but frankly quite surprising result over a period in which interest rates rose, and inflation rose well above the target range."Can this really be right?" he asked.He said to answer that question, one has to look at how the more detailed survey responses have evolved.And that's where one will find some worrying news."Unsurprisingly, trust in our near-term ability to achieve our objectives, looking one year back and one year forward, has fallen materially," he said."Regression analysis finds these outcome measures play a statistically significant role in explaining respondents' overall trust."Australians understand our inflation mandate and hold us accountable when we fail to meet it," he said.In the graphic below, the final two blue rows show how Australians are losing faith in the RBA's ability to achieve its near-term inflation objectives.Businesses also becoming less certainMr Hauser said trust played a very important role in the RBA's ability to manage Australians' inflation expectations.But he said according to Macquarie University's Business Outlook Scenario Survey (BOSS), more businesses were becoming less sure that the RBA's inflation target will be achieved over the next 5-10 years."Some contacts in the RBA's liaison program say similar things," he said."Australia currently has no reliable measure of households' longer-term expectations, but their deep concern about inflation suggests they might feel somewhat similarly."He said that was why the RBA was determined to do what it had to do to get inflation down.Just as we need it most, trust is under strainOn Tuesday this week, the RBA's Monetary Policy Board lifted interest rates to 4.85 per cent, their highest level in 18 years.Mr Hauser said it was imperative that the RBA maintained the trust of Australians in its ability to control inflation, especially now when the global economic situation was so fraught."The decades following the 1980s were good times for central banks around the globe, as flexible inflation targeting delivered consistently low and stable inflation alongside rising real incomes," he said."But more recently, and particularly since COVID, things have been rockier: persistent above-target inflation has marred that hard-won track record."The broader climate of trust towards public bodies has deteriorated."And we've entered a VUCA (Volatile, Uncertain, Complex and Ambiguous) world, amid a fusillade of shocks from tariffs, wars, geopolitical tensions, pandemics, and technological and environmental change."That means inflation is more likely to be pushed off target, economic forecasts are more likely to be wrong, and policy trade-offs get uglier."Just as we need it most, trust is under strain," he said.