The Australian central bank’s decision to keep interest rates unchanged this week doesn’t imply an end to its policy tightening cycle, Governor Philip Lowe said, reinforcing his long-held resolve to return inflation to its 2-3% target.
(Bloomberg) — The Australian central bank’s decision to keep interest rates unchanged this week doesn’t imply an end to its policy tightening cycle, Governor Philip Lowe said, reinforcing his long-held resolve to return inflation to its 2-3% target.
“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 RBA’s practice in previous cycles.
The RBA has cemented its position as a policy outlier by adopting a more dovish approach than nearby New Zealand, as well as the US and Europe. Central banks in those three jurisdictions have pushed ahead with hikes 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,” the governor said. “But it does not mean that Australia is immune to stresses abroad.”
Lowe highlighted three key factors that have a bearing on the 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
“The board is watching developments carefully in each of these areas,” Lowe said, pointing to the RBA’s central scenario for economic growth to slow and unemployment to increase. “It is a narrow path, though.”
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 economic outlook to be released on May 5.
The governor said that the board’s priority is to return inflation to target “in a reasonable time.” The latest monthly consumer-price reading was 6.8% in February, down from 7.4% in January
“If inflation becomes ingrained in expectations, it requires even higher interest rates and a larger increase in unemployment to get it back down again,” he said. “It is for these reasons that the board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”
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