I wrote about central bank purposefulness a couple of months ago, and on reflection I was not happy with what I had written. The argument was buried under too much scaffolding. This is a second attempt, stripped back to what I actually wanted to say. The core argument is that a central bank should follow three principles:
- Don't be a cowboy;
- No surprises; and
- Stay in your lane.
The first is about how the Bank moves, the second about how it communicates, and the third about what it comments on. Each is a piece of the same underlying point. The Bank's credibility is the asset that makes its instrument work, and credibility is built and lost through the ordinary discipline of how the institution carries itself. Cowboy rate setting depletes it. Surprises deplete it. Editorialising on matters outside the mandate depletes it. Everything else in the post is consequences of those three.
Credibility is a stock, not a flow. It accumulates slowly through consistent, well-signalled, proportionate action. It depletes through erratic moves that look like the Bank is reacting to the day's headlines rather than executing a coherent strategy.
Credibility is what makes the instrument work. A 25 basis point move from a credible central bank propagates through the entire term structure. Long rates shift, the exchange rate moves, asset prices reprice, and households and firms adjust their expectations. The cash rate is a small lever, but it is connected to a long mechanism, and the connections only hold while markets believe the Bank's reaction function is readable and coherent.
Don't be a cowboy: rate setting should be purposeful
Rate setting should be deliberate, proportionate, and well-signalled. The reasons for the Bank's bias and outlook should be clear. The public should know whether the Bank has an easing bias, a tightening bias or a neutral bias. Every time the Bank raises or lowers rates, it should be readable as part of a coherent strategy, consistent with the Bank's outlook rather than a reaction to the day's data print or headline. Large movements (50 basis points or more) should be reserved for exceptional circumstances. Fast reversals should not occur. Absent a crisis, the Bank should not (for example) raise the rate 50 basis points one meeting to then drop it 25 basis points at the next.
Cowboy rate setting breaks the connections. When markets cannot predict whether the next move will be 25, 50, or zero, every participant widens their distribution of expected outcomes. Wider distributions mean higher risk premia, more volatile asset prices, and noisier transmission of every future move. The Bank then needs larger moves to achieve the same effect, because each move now carries more uncertainty about whether it is a one-off or the start of a pattern. Cowboy rate setting is self-defeating in exactly the way it is meant to look decisive.
There is a crisis exception. The GFC and COVID warranted big, fast moves, and the Bank was right to deliver them. These moves were not foreshadowed in the technical sense, but they were not surprising either. The crisis itself did the foreshadowing work. Every market participant could see what was unfolding and was already expecting decisive action. The no-surprises principle held, just not through the usual mechanism. The exception is real but narrow. It applies when the situation is recognisably extraordinary, not when ordinary forecasting uncertainty makes the next decision feel difficult. Outside that narrow window, orderly movement is the rule. The crisis exception is what justifies the deliberate pace, not what undermines it. A Bank that moves orderly in normal times preserves the credibility that lets it move dramatically when the situation requires.
The historical anchor is Burns and Volcker at the US Fed in the 1970s and 1980s. Burns moved when he felt pressure, in the direction the pressure was pushing. The result was an institution whose reaction function nobody could read, which is why expectations unanchored. Volcker's achievement was not merely that he hiked harder. It was that he made the Fed's reaction function credible again. The hikes worked because the market knew what they meant. Credibility was a precondition for the disinflation, and the disinflation then reinforced it.
No surprises: communication is part of the job
There is a serious view that the Bank should just do its job and not concern itself with bringing markets and the community along. Set rates well, publish the data, and let other people do the explaining. The argument has some force. Communication takes time and attention away from the underlying work, and a Bank that talks too much risks becoming a player in the news cycle rather than a steady hand above it.
I disagree with the conclusion. If credibility is a stock, it requires active maintenance, and communication is the maintenance work. The foreshadowing, the press conferences, the published minutes, the explicit statements about how the Board is reading the data, the willingness to say what alternative paths were considered. Each is a deposit into the credibility stock. The principle behind all of this is no surprises. Markets, firms, and households should never be blindsided by a Bank decision, because a blindsided market reprices in panic rather than in line with the Bank's reasoning. The expectations channel is also one of the most powerful transmission channels the Bank has, and it cannot fire without communication. A foreshadowed move tightens financial conditions before the move is delivered. A Bank that operates in silence has unilaterally surrendered one of its most powerful instruments.
The 2023 Review of the Reserve Bank reached the same conclusion. Recommendation 10 was titled, plainly, "Strengthen monetary policy transparency and accountability." The Review wanted the Bank's communications to include the reasoning behind decisions, the alternative options considered, and how current settings fit into a broader strategy. The principle Lowe articulated in response was that the Bank should be as transparent as it reasonably can in a way that is useful to the community. Eight meetings a year instead of eleven, post-meeting press conferences, more detailed forecasts, unattributed votes, fuller liaison reporting. None of that is decoration. It is the institutional acknowledgement that communication is part of the job.
Communication can also go badly wrong. Lowe's 2020 and 2021 statements that rates would not rise until 2024 are the cautionary tale. The conditional framing was real but got stripped out of the public version, and mortgage holders who borrowed on the strength of the guidance felt misled when rates rose in 2022. Lowe was not reappointed, and the episode became central to the Review-era debate.
The lesson is not that communication is dangerous. It is that point forecasts on state-contingent variables are dangerous. The cash rate in three years depends on data that has not arrived. Promising a path is forecasting something the Bank cannot know. Explaining the reaction function is different. The Bank can credibly say what it is weighing, whether it has a tightening or easing bias, what would change its mind, and how it is reading the current data against its framework. That kind of communication builds credibility because it is defensible whichever way the data turns.
The wrong response to the Lowe episode is blancmange. The Bank, having been burned, retreats into language so hedged that it communicates nothing. Every sentence balanced by its opposite, every press conference an hour of words from which no listener learns anything. This is not safer communication. It is communication with the content removed, and it depletes credibility through a different mechanism. If markets and households cannot tell what the Bank is weighting, they cannot read what its next move means, and the reaction function becomes unreadable.
The job comes with genuine uncertainty, and some hedging is part of honest communication. Monetary policy operates with long and variable lags, perhaps up to eighteen months for the full effect of a rate change to flow through. Conditions can shift unexpectedly between meetings. A Bank that pretended otherwise would be lying. The discipline is to hedge on the right things. Be specific about the factors currently in consideration, what the Board is reading them as saying, and what would change the assessment. Be appropriately conditional about how those factors will evolve over the horizon, because that genuinely is uncertain. The horizon view is not a forecast. It is a statement of what the Bank will be watching for, expressed honestly enough to be wrong about.
Stay in your lane: the Bank should stick to its job and do it well
The other part of credibility maintenance is mandate discipline. The Bank's job is narrow. Return inflation to the band, support full employment, and do those things with the one instrument it has. The Bank damages its credibility if it publicly criticises actors and factors outside its mandate that influence inflation. That includes government spending, wage settlements, migration policy, energy policy, and fiscal policy more broadly. Fiscal policy is the Treasurer's job and the electorate's job. Wages policy is the labour market's. Housing affordability is a function of zoning, tax settings, migration, and the construction sector, almost none of which the Bank controls. Each time the Bank editorialises on these, it spends credibility on something that is not its job, and it invites the question of whether its rate decisions are coloured by those preferences.
There is an important distinction. The Bank should incorporate fiscal policy into its forecasts. It should not campaign on it. Demand pressures from government spending, the income tax cycle, and transfer payments are inputs to inflation. The Bank has to read them, model them, and set rates accordingly. That analytical work is part of doing the job. What the Bank should not do is editorialise on whether the fiscal stance is right or wrong, or whether the Treasurer should be doing more or less. The first is technical. The second is political.
There is a view circulating that the Bank's reluctance to comment publicly on fiscal policy reflects political intimidation. The Treasurer has cowed them. Bullock should be calling out government spending and isn't. I read the same silence as discipline. Speaking on fiscal policy is the fast route to a loss of independence, not the defence of it. The moment the Bank starts editorialising on the budget, it has volunteered to become a political actor. Every future government will then ask whether the Governor's monetary policy decisions are coloured by their fiscal preferences. The next government changes the appointments to find a Governor whose fiscal preferences align better with theirs. The mandate gets revised. Within a cycle, independence is gone, and the Bank has only itself to blame.
There is also a clean division of labour. Analysing fiscal policy is what the media, the Parliamentary Budget Office, Treasury itself, independent economists, the Productivity Commission, and engaged citizens are for. None of those institutions will be silent. The Bank does not need to enter the conversation, and entering it would crowd out the people whose job it actually is. You stay in your lane and trust other institutions to operate in theirs.
Judgement is the whole point
A different critique comes from the technocratic direction. Just publish the models. Publish the data inputs every quarter. Follow the rule(s). Eliminate the discretion. If the Bank's reaction function is supposed to be readable, the cleanest way to make it readable is to write it down as a formula and stick to it.
The appeal is that this removes judgement, which removes the possibility of bad judgement. The problem is that it also removes the possibility of good judgement, and good judgement is most valuable precisely when the model is wrong.
The post-GFC fall in the neutral rate is the cleanest example. The economic theories and models said one thing about r*. Reality said another, and the gap was large and persistent. Central banks that mechanically followed the theory and the models would have kept policy too tight for years, with serious consequences for output and employment. The ones that exercised judgement, weighting what the models do well against what they do poorly, did better. None got it perfectly right. All did better than the rule would have done.
The technocratic critique misunderstands what a central bank is for. If the model could be trusted to set policy, you would not need a central bank. You would need a spreadsheet. The whole institutional apparatus, the Board, the deliberation, the published reasoning, exists because the model output is one input among many and the weighting requires judgement. Stripping out the judgement does not produce better policy. It produces policy that is wrong in the same direction as the model is wrong, with more confidence. Communication is what reconciles judgement with accountability. The Bank should be transparent about the inputs and the reasoning. It should not pretend the inputs and the reasoning amount to a formula.
Two Flavours of Bad Commentary
There is a lot of commentary at the moment asking the Bank to widen its job or speed up its pace. It comes in two flavours that look opposite but make the same error.
The hawkish version says the Bank should hike harder than the data warrants in order to discipline fiscal policy. A 50 basis point shock, sent as a shot across the bow before a federal budget, with the Governor pointing publicly at government spending. The dovish version says the Bank should resist rate hikes or cut deeper and faster than the data warrants to relieve mortgage holders.
Both versions want the Bank to weight something other than its mandate. The hawkish version wants it to weight fiscal restraint above the inflation target. The dovish version wants it to weight mortgage holder welfare above the inflation target. Both politicise the institution from different angles. Both ask the Bank to deplete its credibility stock in service of an outcome the commentator happens to want.
The dovish version is also wrong on the economics. The mortgage cash flow channel is one of the smaller main transmission channels in aggregate, as I worked through in a previous post. The commentary that is loudest about Bank cruelty to mortgage holders is loudest about the channel that does relatively little of the work. The hawkish version is wrong on the institutional logic. If fiscal policy is too loose, the Bank absorbs the fiscal stance as an input and sets rates to hit its target. The discipline on fiscal policy comes from voters, from bond markets, and from the Treasury's own constraints. It does not come from a central bank firing warning shots.
The Bank's answer to both should be the same. We have one main instrument and a narrow mandate. We will set the instrument to serve that mandate. Everything else is for other institutions.
The Test Case
The Australian labour market through 2025 was the kind of episode that puts purposefulness under pressure. Unemployment had been drifting up through 2024 and into early 2025, and the Bank cut. The cuts were data-justified at the time, even if the final one looks mistimed in hindsight. Then the labour market turned. Unemployment peaked around mid-2025 and rolled over sharply, from around 4.3 per cent to around 4.1 per cent and falling. Trimmed mean inflation bottomed around 2.8 to 3.0 per cent in mid-2025 and re-accelerated back to 3.3 to 3.5 per cent. Both channels pushed the wrong way at once.
This is exactly the kind of moment when the temptation to overcorrect is strongest. The data is jumping, the previous decision looks wrong, and the commentariat is loudest. The dovish version wants the Bank to keep cutting because mortgage holders are hurting. The hawkish version wants a 50 basis point hike to restore order. Both want drama.
The Bank did neither. The December 2025 meeting flagged concerns and prepared markets for a potential shift. The February 2026 hike was delivered as foreshadowed, sized at 25 basis points, with markets having already priced it. No surprise, minimal disruption, and the move tightened financial conditions through the expectations channel before it even happened. That is what credible central banking looks like under pressure. Read the data, signal first, move proportionately, refuse the temptation to make the move bigger than the signal warrants, and keep talking through it so that everyone knows what is happening and why.
The Unglamorous Virtue
Credible central banking looks unglamorous from the outside. The deliberate pace, the foreshadowing, the willingness to move when the data warrants but not before, the proportionate sizing, the careful avoidance of fiscal commentary that would politicise the institution. None of these make for a dramatic opinion column.
That is the point. The boring institution is the credible one. The institution that is constantly being praised or attacked for its bold interventions is the one whose reaction function is being negotiated in public, which is the one whose credibility is leaking. Each refusal to do the thing commentators are demanding is a small contribution to maintaining the asset that makes the instrument work.
The deliberate pace is not a tactic. It is the maintenance routine for the asset that makes everything else work. Stay in your lane, communicate the reasoning, exercise judgement where the model cannot, move on the data not on the headlines, size the move to the signal, and let the unglamorous version of competence do its job.
another great article
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