RDP 2026-06: Perceived Monetary Policy Rules: Evidence from Professional Forecasters in Australia 6. Conclusion

This paper provides a time-varying account of how professional forecasters perceive the Reserve Bank of Australia's reaction function. Using forecaster-level expectations across horizons, we recover perceived policy rules and link their evolution to communication, disagreement, and high-frequency identified monetary policy surprises. Several themes and lessons emerge.

First, reaction functions perceived by market participants can differ markedly from those embedded in standard macroeconomic models. This has important implications for interpreting movements in yield curves and for the use of such models in policy analysis and scenario design, particularly when assessing the stabilising role of systematic monetary policy.

Second, central bank communication can materially influence perceptions of the reaction function. This is evident in the mid-2010s, when communication emphasising financial-stability risks coincided with a perceived weakening of the inflation response, and in the post-COVID period when discussions of preserving labour-market gains and conditioning policy on wage growth shaped forecaster beliefs. These episodes highlight both the power of clear, targeted communication, and the risk that communication may shift perceptions in unintended ways.

Third, actions can speak louder than words, especially under heightened uncertainty. In the period following COVID, increasingly hawkish communication did not translate into a stronger perceived inflation response until policy tightening actually commenced. Sustained policy actions, rather than forward guidance alone, ultimately re-anchored beliefs about the primacy of inflation control.

Fourth, most disagreement about future interest rates reflects disagreement about future economic conditions rather than disagreement about the reaction function itself. This suggests that when central banks seek to align expectations across agents, communication may be most effective when directed toward clarifying the assessment of economic conditions and risks, rather than restating the policy framework.

Finally, dispersion in long-run inflation expectations is an important driver of heterogeneity in interest rate expectations. These differences reflect systematically different views about the economy, underscoring the importance of looking beyond average measures when assessing the anchoring of inflation expectations and the formation of beliefs. Standard fixed effects structures appear to do a good job of controlling for such variation in estimation of perceived reason functions.

Taken together, our findings underscore the value of clear communication, reinforced by consistent policy actions, in shaping expectations and enhancing the effectiveness of monetary policy.