The Reserve Bank’s new deputy governor has launched a scathing attack on overconfident rate forecasts, in a take-down calling them ‘false prophets’ playing a ‘dangerous game’.
In Brisbane for a speech to the Economic Society of Australia titled “Beware False Prophets”, RBA deputy governor Andrew Hauser was astounded by the “extraordinary certainty with which individual views about the outlook for the economy and the path of monetary policy can sometimes be expressed”.
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Deputy Governor of the RBA Andrew Hauser has been in the job since February 12 this year after an esteemed career with the Bank of England. Picture: Britta Campion / The Australian
“‘The economy is falling off a cliff’; ‘No – the economy is red-hot.’ ‘Rates up now – we’re way behind the curve’; ‘Rates are clearly far too high – slash them’; ‘It’s vital rates stay where they are’. Those seeing things differently are castigated as incompetent, biased or on the make. And changes in view are presented as disastrous or humiliating failures. In short, it’s a world of winners and losers, gurus and charlatans, geniuses and buffoons.”
The Oxford-educated economist warned “when the stakes are so high, claiming supreme confidence or certainty over what is an intrinsically uncertain and ambiguous outlook is a dangerous game”.
“At best,” he said, “it needlessly weaponises an important but difficult process of discovery. At worst, it risks driving poor analysis and decision-making that could harm the welfare of all Australians.”
Mr Hauser, who joined RBA as deputy governor in February after being executive director with the Bank of England, said it was “right to want to be confident that the central bank will bring inflation back to target and maintain full employment: that is the RBA’s mandate, and we should be held to account for it”.
“But,” he said, “the policy strategy required to deliver that outcome, and the economic judgements that inform it, simply cannot be stated with anything like the same degree of certainty. Those pretending otherwise are false prophets.”
He said “we are all prone to overconfidence, particularly when forecasting the future”.
“In many cases, the answer we ought to give is that we simply do not know.”
Mr Hauser said “the billion dollar question is how to map essentially uncertain judgements into policy decisions”.
“In some cases, uncertainty may induce you to be less activist – as you wait for more data, or try to avoid triggering tail risks through your own actions. In others, it can induce you to be more activist: for example, the asymmetry of potential outcomes underpinned the policy response in many countries during the COVID-19 pandemic.”
“But beware anyone who claims it is obvious what to do – for they are false prophets!”
English (US) · 