The RBA calls 3 per cent a nightmare. Its own target says 3 is fine
Andrew Hauser says businesses expecting 3 to 3.5 per cent inflation are a central banker's nightmare. But 3 is inside the band the Reserve Bank publishes. You cannot blame people for believing the number you gave them.
The Reserve Bank of Australia sets the official interest rate, which feeds through to mortgages and savings. It is meant to keep price rises between 2 and 3 per cent a year; they are currently running at 4 per cent. Its deputy governor has now warned that businesses are starting to expect permanently higher inflation, and markets think a rate rise on 3 November is more likely than not.
A business expecting 3 per cent inflation is expecting an outcome the Reserve Bank has declared acceptable. If the bank thinks that is a nightmare, it is really targeting 2.5 — and it should say so before raising rates because people believe the wrong number.
Three per cent is not a nightmare. It is the ceiling of the target
The Reserve Bank of Australia’s deputy governor, Andrew Hauser, told an investment conference in Sydney this week that an increasing share of businesses think “maybe, sort of 3 per cent, 3.5 per cent is the new normal”, and that this is “the central banker’s nightmare”.
Read that sentence slowly. It contains two different numbers doing two different jobs. Three and a half per cent is above the Reserve Bank’s target and would be a genuine problem. Three per cent is inside it. The bank aims to keep headline inflation between 2 and 3 per cent on average over time. A firm that pencils in 3 per cent for next year’s price rises is pencilling in an outcome the central bank has publicly committed to tolerating.
You cannot run a target with a ceiling of 3, publish it for three decades, and then call it a nightmare when price-setters take the ceiling seriously.
The number the public was handed is a range
Monetary economists will say, correctly, that the operational anchor is the middle of the band — 2.5 per cent — and that everyone who matters knows it. But the audience Hauser is worried about is not the people who matter in that sense. It is the manufacturer deciding next year’s price list and the services firm setting a wage offer. What those people have been handed, in every plain-English description of the framework they will ever encounter, is a range.
If the bank wants the midpoint to be the anchor, the midpoint has to be the thing that is advertised. Instead the midpoint is the quiet convention and the band is the headline. That is a comfortable arrangement when inflation is low, because the ambiguity gives the board room to ignore a bad quarter. It is an expensive one now, because the bank is preparing to raise borrowing costs partly on the grounds that the public has the wrong number in its head, when the number in the public’s head is one the bank put there.
“On average over time” only ever runs one way
The second half of the target phrase deserves the same scrutiny. Inflation is currently 4 per cent on the August consumer price index. For the average over time to land inside 2 to 3, something has to run below 2.5 for a while to offset it.
Nobody — not the bank, not the market, not the firms being surveyed — seriously expects the Reserve Bank to engineer a deliberate undershoot to clear the debt built up by four years of overshooting. So “on average over time” functions as a one-way valve. It excuses the periods above, and it is silently dropped when it would require periods below. A business that has watched that happen and concluded the practical target is “3-ish, give or take, and we never pay it back” has not de-anchored. It has observed.
The evidence is a description, not a series
The case for de-anchoring rests on the bank’s liaison programme and its surveys. Those are real instruments and the bank is right to watch them. But what the public has been given is a characterisation of them, delivered in a speech, a fortnight before a decision markets already price at better than even odds.
There is a large difference between a distribution where firms have bunched at 3 — the ceiling, which is a framework problem — and one where the tail has moved to 3.5 and 4, which is a credibility problem requiring a rate rise. The two call for entirely different responses. One is fixed by saying 2.5 out loud and meaning it. The other is fixed by tightening. The speech lumps them into a single phrase and asks us to take the conclusion on trust.
The case against this argument
The strongest defence of the band is that it buys flexibility. A point target invites mechanical responses to one-off shocks — a flood, an energy price spike, a quarterly surprise — and forces the bank to explain every deviation. The range lets it absorb noise without a credibility crisis each time, and the “on average over time” clause is what allowed the bank to look through the pandemic supply shock rather than crushing employment to hit a number.
That defence holds for the path. It does not hold for the destination. Flexibility about how fast you get back is a feature. Ambiguity about where back is defeats the entire purpose of having a target, because expectations are a statement about the destination and nothing else. A firm setting prices for the next twelve months needs one number, not a range plus a timeframe qualifier plus an unwritten convention about the midpoint.
And there is a cost to getting this wrong in the other direction. A rate rise on Melbourne Cup day will land on mortgage holders in an economy where capital city house prices have just fallen 4.7 per cent in a quarter and one of the four major banks is shedding 2,500 roles. That bill should be justified by something firmer than an adjective.
Two things, both within the Reserve Bank's gift before the November meeting. First, the board should state in its decision statement, in plain words, the single figure it expects firms and wage-setters to build into their plans — and if that figure is 2.5 per cent, say 2.5 per cent rather than leaving the band to speak for it.
Second, the bank should publish the inflation expectations evidence it is citing, as a distribution by bucket, updated each quarter alongside the Statement on Monetary Policy. If expectations are now a trigger for tightening, they must be a published series the public can track, not a sentence in a speech.
What would change this view
If the Reserve Bank publishes, with or before the November decision, the distribution of business and household inflation expectations it is relying on — how many respondents sit at 2.5, at 3, at 3.5 and above, and how those shares have moved over the past year — and that distribution shows the mass shifting above 3 rather than clustering at it, my complaint about the evidence collapses and the hike is justified on its own terms.
Equally, if the November statement says in plain words that the bank expects price-setters to use 2.5 per cent, the ambiguity I am objecting to is gone and the criticism is spent. Both are things the bank can do in a fortnight, and either would settle it.
Worked from
- RBA deputy warns inflation outlook 'materially worse' as next decision looms
ABC News · 2026-10-21