CB Intel Perspective of RBA Policy Missteps and the Current Elevated Inflation Risk
- Published on
- 01 Dec 2025, 12:13 PM
(This Analysis was first published on Sunday, November 30 at 11:17 PM)
By Sophia Rodrigues
(Sydney, November 30, 2025) – “What you don’t fix now, you pay for later.” This proverb sums up Australia’s inflation mess, but with a cruel twist.
The RBA let elevated inflation linger, and the Australian public is now footing the bill.
CB Intel argues that the core problem stems from the approach the RBA, led by Governor Philip Lowe, adopted from the very start of the tightening cycle.
They can be listed as:
- Stating it will return inflation to target “over time”
- Keep the economy on an “even keel”
- Pointing to “narrow path”
- Emphasis on preserving labour market gains
- Finally, explicitly stating “narrow path” as a strategy where the aim was to hold on to as many of the labour market gains as possible.
And of course, there were forecasting flaws too.
Back on June 20, 2022, CB Intel wrote an article questioning the RBA’s forecasts.
Already, there is a flaw in the RBA’s May SOMP forecasts. It shows the unemployment rate going from 3.8% in the June quarter to 3.7% in December to 3.6% by June 2023 and staying at that level until the end of the forecasting period, which is June 2024.
How is it possible that inflation gets back to the target band (even if it is at the top end of the target) without the unemployment rate drifting higher?
On July 20, 2022, CB Intel wrote regarding “over time”:
In recent weeks, I have wondered if the RBA’s aim is to anchor inflation expectations, can it continue to tell us that it will bring inflation back to target “over time”?
Because “over time” would mean the RBA will tolerate somewhat high inflation for a period, and if it shows tolerance, how can it expect my expectations to remain anchored?
And then barely four meetings since the first cash rate hike in May 2022, Lowe topped the “over time” strategy with “even keel.”
In the August 2022 cash rate statement, Governor Lowe said, “The Board places a high priority on the return of inflation to the 2–3 per cent range over time, while keeping the economy on an even keel. “
That strategy continues to surprise me to this day. I will explain why later.
On September 2, 2022, CB Intel wrote the RBA either needs to drop the “even keel” message or at least tweak it.
One line the RBA might have to think carefully about is the one it introduced last month: “The Board places a high priority on the return of inflation to the 2-3 per cent range over time, while keeping the economy on an even keel.”
Next week will be too early to remove, but the RBA might want to tweak the message to make it clear it is aiming to keep the economy on an even keel, not pledging to.
The difference is important because the current wording sounds more like a commitment, much like its forward guidance on no rate hike until 2024 which it copped a lot of flak for.
The language suggests the RBA would be willing to slightly pull back on its inflation goal if raising the policy rate beyond a certain point runs the risk of pushing the economy into recession and the unemployment rate higher.
Given the uncertainties, it would be imprudent for the RBA to assume it can afford to take its eyes off inflation at any point, especially when it has already acknowledged the path is narrow.
The RBA listened. At the September 2022 meeting, the language was tweaked to clarify “even keel” is an aim, not a commitment.
CB Intel wrote:
The highlight of the Reserve Bank of Australia’s cash rate statement was a clarification that its commitment is to return the inflation to the target band and keeping the economy on an “even keel” is what it is aiming for, but not committing to.
The RBA is now making it clear that its priority is inflation.
“The Board is committed to returning inflation to the 2-3 per cent range over time. It is seeking to do this while keeping the economy on an even keel,” the RBA said Tuesday, after raising the cash rate target by 50 basis points to 2.35%.
As a result, the risk to monetary policy remains to the upside and 3.1% cash rate by the end of this year looks more likely, with risk tilting towards 3.35%.
Why was even keel, or narrow path, or preserving labour market gains a bad strategy?
Simply because the Australian economy was strong enough to cope with higher interest rates.
Economists, media and even the RBA focused too much on the so-called mortgage cliff (Covid-era low-rate fixed mortgages moving to higher floating rates), instead of taking signals or confidence from the strong labour market.
At the time, available data showed the unemployment rate was 3.5% (June 2022), the participation rate was 66.8% and the employment-to-population ratio was 64.6%. Inflation was at 6.1% then and projected to reach 7.8% by December 2022.
Compare this with pre-Covid unemployment rate of 5.1%, participation rate of 66% and employment-to-population rate of 62.6%.
Why would the RBA tone down its messaging while the fight against inflation was still raging? How could it -- deliberately or otherwise -- give the impression that it wouldn’t take a tough line on inflation, and therefore on interest rates?
Central bank communication is as important as its actions. Central banks know it. The RBA knows it too.
Central banks tighten monetary policy to force economic adjustments that bring inflation back to target. But once their language implies rates won’t rise as far as necessary, what incentive does the economy have to adjust at all?
How confident can a central bank then be about meeting its inflation target?
What puzzled me most was why an economy with one of the strongest labour markets and that showed no real signs of cracking, chose a strategy centred on preserving labour-market gains.
That question stuck with me as I watched Governor Michele Bullock continue using the same phrasing and pursuing the same “preserve labour market gains” approach.
In September 2024, I asked Bullock this question:
So back in August 2022, Dr Lowe and the RBA Board - Dr Lowe formulated the strategy that we will go slow on inflation and protect gains. Since then for all the Board meetings from then to now, how often have you revisited the strategy and did the RBA at any point think that we need to go hard?
Her answer was:
So yes, that’s something we discuss at every meeting and we still think, as I said, that we’ve got the right level of restrictiveness at the moment but if the data start to suggest to us that one way or the other, we’re either on the down-side or on the up-side, then we will have to respond. Can’t rule anything in or out.
While Bullock was honest in stating the RBA will respond if the data turns to the upside, the problem since then has been the poor judgments made during the forecasting exercise.
In a separate article, CB Intel recently examined the three critical judgments made in the February, May, and August forecasting rounds. Those calls produced forecasts that gave the RBA room to cut the cash rate. The result is that inflation remains uncomfortably high.
Could this have been avoided? Absolutely.
During the Covid period, the RBA’s mistakes stemmed from an overly pessimistic focus on downside risks. In the post-Covid era, it repeated the error by underestimating the economy’s upside strength.
Ultimately, it came down to weak strategy, muddled communication, errors of judgment, and faulty forecasting -- leaving inflation still elevated in the second half of 2025, with upside risks extending into 2026.
--Contact: Sophia@centralbankintel.com