Philip Lowe, governor of the Reserve Bank of Australia, speaks through the Australian Payments Network Summit in Sydney Dec. 14, 2022.
Brendon Thorne | Bloomberg | Getty Images
The pinnacle of the Reserve Bank of Australia (RBA) reiterated on Wednesday that rates of interest had not peaked, adding that he was unsure how high they’d to go because the central bank, in search of to regulate inflation, tried to follow a narrow path to a soft landing.
Getting there, and avoiding a recession, relied on moderation in wage rises, RBA Governor Philip Lowe told members of parliament.
Despite a series of rate of interest rises that began in May, consumer price inflation hit a 32-year high within the fourth quarter.
“Inflation in the mean time, 7.8%, is way too high. It needs to come back down. That is our primary consideration,” Lowe said.
When asked about how far rates of interest would need to rise, he said policymakers had an open mind.
“I do not think we’re at the height yet but how far we have now to go up I do not know,” he said, adding that the central bank would keep monitoring inflation, consumer spending, the worldwide economy and wages growth.
The RBA was not attempting to push the economy right into a recession, and a narrow path to a soft landing was available if wage rises stayed reasonable, he said. The danger of a spiral of wages driving up prices then prices driving up wages was relatively low, he said, but when it happened the prices can be high.
Wages within the third quarter were 3.1% higher than a yr before.
The central bank has lifted its policy rate by 325 basis points since May to a decade high of three.35%.
“There’s a risk that the tightening of policy that is taken place does dampen spending greater than we expect,” Lowe said. “We haven’t got a wonderfully clear crystal ball.”
“But there’s a risk on the opposite side. There’s a risk that we have now not yet done enough with rates of interest and spending is more resilient and that inflation stays high.”
“So the risks are two-sided and we’re attempting to navigate our way through a narrow path. I understand why some people give attention to the risks on the one side but we have got to be attentive to the danger from higher inflation.”
Markets see higher peak
The RBA most recently implemented an rates of interest rise on Feb. 7 and said more would come. Markets responded by raising the expected peak for the policy rate to around 4.2% from 3.6% a month before, implying there can be not less than three more rises.
A shock fourth-quarter inflation report issued on Jan. 25 showed consumer prices had been 7.8% percent higher than a yr earlier. A closely watched measure of inflation – the trimmed mean – was up 6.9%, exceeding the RBA’s forecast for a 6.5% rise.
The central bank later said that, although inflation had likely peaked within the fourth quarter, domestic cost pressures were still strengthening. That implied resilience in future inflation.
The RBA forecasts that inflation might be back in its goal range of two% to three% by mid-2025.
“We wish to get inflation down since it’s dangerous,” Lowe said on Wednesday. “It’s corrosive, it hurts people, it damages income inequality and it if stays high it results in higher rates of interest and more unemployment.”
“Raising rates of interest has at all times been unpopular … but our job is to make certain inflation comes down and hopefully preserve the gains of employment that we have now made.”
The unemployment rate was 3.5% in December, near a five-decade low.
