RDP 2026-06: Perceived Monetary Policy Rules: Evidence from Professional Forecasters in Australia 1. Introduction

Expectations about future interest rates play a central role in shaping economic behaviour. A key channel through which central banks influence these expectations — and thereby achieve their policy objectives — is by communicating and implementing a clear reaction function that maps economic conditions into policy decisions. When the reaction function is well understood, households and markets can respond directly to economic news without waiting for explicit guidance (Woodford 2005). Likewise, if agents believe that the central bank will respond forcefully to inflationary pressures, this belief can help anchor expectations, limit inflationary spirals, and reduce the trade-offs between stabilising inflation and unemployment. As a result, what private agents believe about a central bank's reaction function is a central determinant of monetary policy transmission.

Recent research has emphasised that the policy rule relevant for expectations formation and asset prices is the one perceived by market participants (Bauer, Pflueger and Sunderam 2024a; Bauer, Pflueger and Sunderam 2024b). These perceived rules can evolve over time and differ systematically from those embedded in structural macroeconomic models. Understanding how such perceptions are formed, how they change, and what drives belief updating is therefore crucial for both monetary policy design and communication.

Relatedly, in the Australian context the RBA Review Panel (2023) emphasises the importance of clear communication about policy strategy and the rationale for decisions, arguing that well-understood frameworks strengthen the effectiveness of monetary policy. Moreover, recent evidence suggests that markets have historically systematically misread how the RBA responds to economic data, indicating that market participants do not have a clear understanding of the RBA's reaction function (Hambur and Haque 2024). Quantifying perceived policy rules, how they change over time, and what drives them therefore speaks directly to both of these concerns.

Against this backdrop, we address the following questions. What reaction function do professional forecasters perceive the Reserve Bank of Australia to follow, and how have these perceptions evolved over time?

To answer these questions, we adapt the survey-based framework of Bauer et al (2024a) and Bauer et al (2024b) to the Australian context. Using forecaster-level data from the RBA Market Economist Survey from 2015 to 2025, we estimate Taylor-style rules that map expected inflation, unemployment, and — in extensions — wage growth into expected cash rates. We then relate shifts in the perceived reaction function to RBA communication and to high-frequency surprises around policy announcements. We also extend existing approaches by directly incorporating forecasters' perceptions of unobservable “star” variables, such as long-run inflation, the neutral interest rate, and the non-accelerating inflation rate of unemployment (NAIRU). This allows us to assess the extent to which heterogeneity in these long-run beliefs helps explain differences in interest rate expectations.

Our work extends the existing literature along a number of dimensions. First, we extend the literature to Australia, a small open economy with a long-standing inflation-targeting framework. While much of the existing evidence focuses on the United States and the euro area, examining Australia is informative for several reasons. Australia has operated under a stable monetary policy framework for decades, experienced a comparatively short effective lower bound episode, and faces inflation dynamics that are influenced by global forces. This allows us to study how market participants form and revise beliefs about policy function when the formal framework is unchanged, but uncertainty about policy implementation and economic conditions evolve over time.

As well as the country dimension, we extend on the existing literature along two methodological dimensions. First, we incorporate dynamic panel estimator approaches and consider how important they can be for the interpretation of the results. Second, we incorporate direct estimates of forecasters' views on unobservables, like long-run inflation and the neutral rate. This allows us to assess how effective existing approaches of removing these expectations using fixed effects are in practice. Directly incorporating these expectations also allow us to better understand how heterogeneous such expectations are, their role in influencing rate expectations.

Several findings and lessons emerge. First, markets perceive the RBA to be less reactive to inflation than captured in some other metrics. In particular, on average over the pre–COVID-19 period, market participants perceived that the RBA placed a lower weight on inflation than is embodied in many of the RBA's structural macroeconomic models, such as its macroeconometric model MARTIN Ballantyne et al (2020), or its DSGE model DINGO (Gibbs, Hambur and Nodari 2018). Accounting for these differences and what they imply about peoples' expectations for future policy is therefore important for policy analysis, scenario design, and the interpretation of yield curve movements.

Second, central bank communication can shape perceptions of the reaction function. During the mid-2010s, markets inferred that the RBA would not respond strongly to variation in inflation, coinciding with communication that emphasised housing and financial stability risks. Following the COVID-19 recession, language stressing the importance of preserving labour market gains aligned with a temporary strengthening in the perceived responsiveness to unemployment during 2021–22. Similarly, repeated references to the need to see wages growth before policy lift-off led to an increase in the perceived weight placed on wages growth in the RBA's reaction function.

Third, we show that sometimes actions speak louder than words, particularly during periods of elevated uncertainty. Coming out of COVID-19, despite increasingly hawkish communication perceptions of the weight the RBA placed on inflation did not adjust materially until after policy rates began to rise. As rate increases accumulated through 2022–23, the perceived inflation coefficient rose sharply, reflecting a reassessment of the Bank's commitment to returning inflation to target. These patterns closely mirror findings for the United States and the euro area (Bauer et al 2024a).

What explains the delayed adjustment in perceived inflation responsiveness despite large inflation surprises and hawkish communication? We show that this timing cannot be attributed to beliefs that inflation was transitory or to perceptions of a persistent “lower-for-longer” policy framework. Instead, the evidence points to a learning mechanism under uncertainty: with substantial disagreement about when and how forcefully the RBA would tighten, forecasters waited for sustained policy actions before revising their views about the reaction function. As in Bauer et al (2024a) and Haba, Hirano, Ito and Kaihatsu (2026), realised actions—rather than forward guidance alone—ultimately re-anchored beliefs during this period.

Fourth, we find that most disagreement about future interest rates reflects disagreement about future economic conditions and long-run “star” variables, rather than disagreement about the reaction function itself. On average, only around 30 per cent of disagreement in interest rate expectations is attributable to differences in perceived policy responses, although this share rises during certain periods, such as in 2025. This suggests that communication may be most effective at reducing disagreement when targeted at shaping views about economic conditions.

Finally, variation in long-run inflation expectations is moderate but economically important. Differences in long-run inflation beliefs account for a substantial share of variation in interest rate expectations, and failing to allow for such heterogeneity leads to markedly lower estimates of the perceived inflation coefficient. This indicates that long-run beliefs are not merely noise, but form a core component of forecasters' broader economic outlooks. This support the use of forecaster fixed effects in the literature, which appear to do a good job standing in for explicit star variable estimates.

Taken together, these findings underscore the importance of clear and targeted communication, supported by credible policy actions, in shaping interest rate expectations. They also demonstrate a practical set of tools that can be used to assess whether central bank communication is being interpreted as intended.

Our paper relates to a growing literature documenting that monetary policy surprises are partly predictable using information available prior to policy announcements. Hambur and Haque (2024) show that policy surprises around the RBA's announcements were partly predictable from publicly available information, while Bauer and Swanson (2023) find similar evidence for the United States. These findings challenge the interpretation of high-frequency monetary policy surprises as fully exogenous shocks and instead point to an important role for learning about the central bank's reaction function. This perspective is consistent with the broader idea that asset prices and expectations are governed by a market-perceived policy rule, an object that can be inferred from market responses to macroeconomic information, but which we study directly using survey expectations (Hamilton, Pruitt and Borger 2011).

Most closely related to our work are Bauer et al (2024a) and Bauer et al (2024b), who document substantial time variation in perceived monetary policy reaction functions in the United States over long samples, and during the COVID period in the United States and the euro area. This literature emphasises that the object relevant for expectations formation and financial market reactions is the policy rule inferred by private agents. More broadly, a growing body of work uses survey expectations to estimate perceived policy rules, particularly in environments where conventional estimation is complicated by the effective lower bound. For example, Fujiwara, Nakazono and Ueda (2015) use survey data for Japan to examine whether aggressive monetary easing induced a perceived regime change, while Haba et al (2026) estimate a time-varying perceived policy rule for Japan using bond-market survey microdata and show that perceived inflation responsiveness rose only after actual policy tightening began. Kim and Pruitt (2017) and Bundick (2015) exploit forecasters' expectations to estimate perceived Federal Reserve policy rules during the zero lower bound period. Complementing this, recent work treats central bank communication itself as rule-like and time-varying, arguing that shifts in the “communication rule” can generate periods of learning (Gáti and Handlan 2022).

The remainder of the paper proceeds as follows. Section 2 describes the data, methodology, and identification strategy. Section 3 presents estimates of the average perceived reaction function. Section 4 documents the evolution of the perceived reaction function over time, including the pre- and post-COVID periods, the delayed response of perceived inflation weights, and the role of “star” variables. Section 5 examines heterogeneity in forecasters' expectations, and Section 6 concludes with implications for communication and policy strategy.