Australia’s central bank sees further rate hikes, welcomes government review

Reserve Bank of Australia (RBA) at the central bank building in Sydney, Australia, Monday, May 2, 2022. Australia’s top central banker said on Wednesday that a steady pace of rate hikes would interest was needed to stop the development of a damaging inflationary cycle, and the suggested rates could at least double from current low levels.

Brendon Thorne | Bloomberg | Getty Images

On Wednesday, Australia’s top central banker signaled that a steady pace of interest rate hikes was needed to halt the development of a damaging inflationary cycle, and suggested rates could at least double from current lows. .

The warning came as the central bank faces the first independent inquiry into its operations since the 1990s, amid criticism over its inflation and policy forecasts.

In a speech at a business conference in Melbourne, Reserve Bank of Australia (RBA) Governor Philip Lowe said it was crucial that high inflation did not trickle down to expectations of businesses and households and becomes a self-fulfilling cycle.

He suggested that rates may need to rise to a neutral level of at least 2.5%, from 1.35% currently, to rein in inflation which is at a 20-year high of 5.1%.

“For inflation to return to the target range of 2% to 3%, a more sustainable balance between demand and supply is needed. Higher interest rates will help achieve this goal,” Lowe said.

The RBA has already hiked rates for three consecutive months and markets are betting on further hikes to nearly 3.5% by the end of the year.

Lowe’s sober outlook comes as the newly elected Labor government released details of a long-running central bank review of its board structure, operations and methods of communicating with the public.

The RBA was criticized for forecasting rates to remain at an emergency low of 0.1% until 2024, only to reverse the trend and start rising in May as inflation beat expectations.

The central bank also exceeded its inflation target of 2-3% for much of the previous decade, leading the IMF to suggest that policy had been too restrictive during those years.

Treasurer Jim Chalmers said the review, due in March, was not about “taking pot shots” at the RBA, but rather seeing if there were better ways to frame and conduct the Monetary Policy.

Lowe said the bank’s board and staff welcomed the review.

“The terms of reference are appropriate and the government has appointed a top-notch panel,” he said. “This is an opportunity to take stock of our monetary policy arrangements and ensure they are fit for the challenges ahead.”

Lowe also defended the RBA’s goal of keeping inflation in the 2-3% range over the long term, saying a soft target for consumer prices was widely accepted as the right framework by central banks. of the whole world.

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