There’s a change coming to the number that guides the Reserve Bank on interest rates

9 hours ago 3

The key number used by the Reserve Bank to set interest rates will change by year’s end, possibly preventing a repeat of its surprise decision not to deliver financial relief to millions of home borrowers this week.

The Australian Bureau of Statistics is close to finalising an upgrade to its monthly measure of inflation that should give the Reserve Bank the confidence to use this rather than quarterly inflation reports when it sets monetary policy.

A full monthly inflation report is on track for year’s end, helping the Reserve Bank to set interest rates.

The difference between monthly and quarterly inflation was a substantial factor in this week’s surprise decision by the Reserve’s monetary policy board to hold official interest rates steady.

May’s monthly inflation report showed annual inflation falling to 2.1 per cent. It has been within the RBA’s 2-3 per cent target band since August last year. But the March quarterly inflation report showed prices up by 2.4 per cent, with underlying inflation just slipping within the RBA’s target band.

Bank governor Michele Bullock on Tuesday noted issues around the monthly inflation report as one of the reasons for the bank’s decision to keep interest rates unchanged at 3.85 per cent.

“To the point about the recent CPI data that we saw, a lot of the focus was on the monthly
data and we think that’s a little too volatile and not quite representative of what’s really going on with inflation,” she said.

At present, the monthly information report updates prices for between two-thirds and 77 per cent of goods and services in any given month, rather than the comprehensive quarterly report.

An extra $156.7 million in the 2023-24 federal budget was given to the bureau to modernise its IT systems, including an expansion of the monthly CPI. That expansion, which includes collecting prices from businesses more often and ramping up its web-scraping processes, is now almost complete.

The bureau’s head of prices statistics, Michelle Marquardt, said more details on the shift to a complete monthly consumer price index would be released later this month.

“We are on track for the publication to commence before the end of 2025,” she said.

The bureau started monthly inflation figures in the second half of 2022, when Australia was just one of two high-income nations without a monthly report.

The absence of monthly inflation data had been an ongoing concern within the Reserve Bank, as waiting for the quarterly report could lead to monetary policy missteps.

In 2018, a small lift in underlying inflation in a quarter had the bank expecting it would have to lift rates. But subsequent quarterly reports, delivered months later, showed price pressures easing.

The Reserve’s target band has been maintained in the formal statement on the conduct of monetary policy between Treasurer Jim Chalmers and the bank that was released on Thursday.

The statement also commits each member of the Reserve’s monetary policy board to deliver at least “one speech or public engagement” a year.

Members of the bank board, apart from the governor and deputy governor, have traditionally been silent on the RBA’s operation.

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