Reserve Bank Governor Philip Lowe has again made clear the central bank will not be changing rates or its current monetary stance, despite the obvious improvement in the economy in recent months.
Speaking at a business conference in Sydney on Wednesday morning, Dr Lowe the “better-than-expected outcomes are very welcome news.”
These include the higher-than-expected 4th quarter GDP growth of 3.1%, rising employment, solid household spending and retail sales, improving car sales and the continuing strong trade account.
Dr Lowe said the improvements in the economy have resulted from the way Australia has controlled Covid. “They reflect the success that Australia has had on the health front, the very large fiscal and monetary policy support, and the flexibility of Australians in getting on with their lives and businesses. As a result, we are now within striking distance of recovering the pre-pandemic level of output.”
But he said these improvements “do not negate the fact that there is still a long way to go and that the Australian economy is operating well short of full capacity.”
“There are still many people who want a job and can’t find one and many others want to work more hours. And on the nominal side of the economy, we have not yet experienced the same type of bounce-back that we have seen in the indicators of economic activity.”
Dr Lowe said that means so far as wages and prices (inflation) are concerned, “there is still a long way to go to get back to the outcomes we are seeking.”
“At the moment underlying inflation is running at 1.25% per cent, and we expect it to remain below 2% over at least the next 2 years,” he said.
Dr Lowe said even when inflation jumps to around 3% in the June quarter (because of the fall in the June, 2020 quarter due to the lockdowns and Covid), the central bank will not be looking to change policy.
“The Board will maintain this setting of the cash rate target until inflation is sustainably within the 2–3 per cent range. It is not enough for inflation to be forecast to be in this range. Before we adjust the cash rate, we want to see actual inflation outcomes in the target range and be confident that they will stay there,” he told his mostly business and media audience.
He did point out that the bank continues to monitor housing prices which are the reason some analysts and economists reckon the RBA will be forced to either tighten rates or follow its NZ counterpart and bring in quantitative restrictions on lending.
“I would like to reiterate that the RBA does not target housing prices, nor would it make sense to do so. I recognise that low interest rates are one of the factors contributing to higher housing prices and that high and rising housing prices raise concerns for many people.
“There are various tools, other than higher interest rates, to address these concerns, leaving monetary policy to maintain its strong focus on the recovery in the economy, jobs and wages,” Dr Lowe said.
