The head of the Reserve Bank has moved to soothe fears that an interest rate hike is imminent, telling Australians there is ample time to get unemployment lower without the economy getting an uppercut from out-of-control inflation.
In an eagerly awaited speech at the National Press Club, governor Philip Lowe said it was “too early” to conclude that underlying inflation had reached a point that would necessitate a rate hike, although prices had accelerated faster than he expected.
With a red-hot economy and low rates stoking fears that inflation will get out of hand, economists have widely tipped a rate hike in the middle of the year – far sooner than the RBA has previously flagged and a prospect that has wreaked havoc on financial markets.
But despite lifting the RBA’s near-term inflation outlook, Dr Lowe insists that Australia can afford to be patient in its quest to achieve ‘full employment’, especially as pandemic-fuelled supply chain disruptions smooxjmtzywth out over the months ahead.
He also told his audience in Sydney that a sharp acceleration in wages growth would be needed before any rate hike is considered.
“In terms of underlying inflation, we have just reached the midpoint of the target range for the first time in over seven years,” Dr Lowe said.
“And this comes on the back of very significant disruptions in supply chains and distribution networks, which would be expected to be resolved over the months ahead.
“It also comes at a time when aggregate wages growth in Australia remains low and is at a rate that is unlikely to be consistent with inflation being sustained around the midpoint of the target range.
“We are in the position where we can take some time to obtain greater clarity on these various issues.”
Dr Lowe’s speech, titled “The Year Ahead”, comes a day after the central bank held firm on the historic low cash rate of 0.1 per cent after its first board meeting of the year.
The RBA also brought an end to its $350bn money printing program – with final bond purchases to cease on February 10 – echoing a move that was signalled by the US Fed in December.
Dr Lowe has previously said there will not be a rate hike until at least 2023, but the strength of Australia’s economic recovery has led economists and financial markets to tip an August rise, with July or June as an outside chance.
Wednesday’s speech appears to be an attempt to hose those fears down.
Banks have already been moving in anticipation of a cash rate hike, with Canstar reporting there were more than 6000 fixed interest rate hikes over the past six months, leaving variable rates the last remaining bargains.
“The board is prepared to be patient as it monitors the evolution of the various factors affecting inflation in Australia,” Dr Lowe said.
