The Australian central bank’s decision to keep interest rates unchanged this week doesn’t mean an end to its tightening cycle, Governor Philip Lowe said, while acknowledging the board is prepared for a slower return of inflation to target than its global counterparts.
(Bloomberg) — The Australian central bank’s decision to keep interest rates unchanged this week doesn’t mean an end to its tightening cycle, Governor Philip Lowe said, while acknowledging the board is prepared for a slower return of inflation to target than its global counterparts.
“The decision to hold rates steady this month does not imply that interest rate increases are over,” Lowe said in a speech in Sydney Wednesday, a day after the Reserve Bank held its cash rate at 3.6%. “Indeed, the board expects that some further tightening of monetary policy may well be needed to return inflation to target within a reasonable timeframe.”
The rate-setting board decided it was prudent to stand pat on Tuesday to allow more time to assess the impact of its 3.5 percentage points of increases since last May, Lowe said. He pointed out that such an approach was consistent with the practice in previous cycles.
The RBA has cemented its position as a policy outlier by adopting a more dovish approach than nearby New Zealand, which surprised with a half-point hike on Wednesday, as well as the US and Europe. Central banks in those three jurisdictions have pushed ahead with tightening in the face of global financial market volatility triggered by bank collapses and bailouts.
“In Australia, the impact of the banking stresses overseas has been limited,” Lowe said. “But it does not mean that Australia is immune to stresses abroad.”
Asked after his address what differentiated Australia from other countries that are still tightening, Lowe pointed to three factors. These are a slower pace of wages growth, the rapid pass through of hikes to mortgages and a desire to hold onto some of the labor market gains made during the pandemic era.
“The board is prepared to have a slightly slower return of inflation to target than some other central banks,” the governor said.
“Our judgment at the moment is that if we can get inflation back to 3% by mid-2025, and preserve many of those job gains that had been delivered in the last few years, that’s a better outcome than getting inflation back to 3% one year earlier and having more job losses”
The RBA targets inflation of 2-3% over time and the latest monthly reading was 6.8% in February, down from 7.4% in January.
Lowe, in his speech, highlighted three key factors that will have a bearing on Australia’s outlook:
- The global economy, in light of the recent bank stresses in the US and Europe
- The strength of domestic household consumption which is likely to remain subdued for some time
- How price- and wage-setting behavior responds to this period of higher inflation
Ahead of the RBA’s next rate decision on May 2, the central bank will conduct a full review of the forecasts and scenarios for the economy and inflation, Lowe said, referring to its quarterly outlook to be released on May 5.
“The main takeaway is that the RBA is not in a rush to get the rate of inflation back to target at the risk of losing jobs,” said Gareth Aird, head of Australia economics at Commonwealth Bank of Australia.
“And if they get inflation back to target in line with their forecasts, which is in 2025, they’ll think that’s a job well done, particularly if that’s accompanied with unemployment remaining low,” he said. “That makes a lot of sense.”
(Updates with Lowe in Q&A, comment from economist.)
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