Reserve Bank Governor Philip Lowe has made it clear the central bank will not be coerced into lifting interest rates by calls from worrywarts like former Treasurer (now chairman of Nine Entertainment) Peter Costello, former central bank board member Warwick McKibbin, and the economics departments of the major banks.
All have called for the RBA to lift rates – some saying June, while others have campaigned for rate rises saying inflationary pressures are getting out of control with the surge in energy and other prices in the wake of the Russian invasion of Ukraine.
But in a speech in Sydney on Wednesday, Dr Lowe made it clear the bank’s recent watchword, ‘patience’ still applied, especially in the wake of the Russian invasion and the dramatic impacts of the flooding in southern Queensland and along the NSW coast and in and around Sydney.
“In this uncertain environment – and with the starting points for wages growth and underlying inflation in Australia – we can take the time to assess the incoming information and review how the uncertainties are resolved,” Dr Lowe said.
Dr Lowe warned on Wednesday that the war in Ukraine was a new inflationary shock to the world economy but Australia still had time to assess the impact before possibly raising interest rates later in the year.
He said the conflict was a major downside risk to the global economy, with the major impact coming through higher commodity prices and inflation.
The RBA would be watching to see if that in turn fed through to rising wage claims, although evidence so far suggested Australians were still getting pay rises under 3%.
He noted underlying inflation in Australia had been running at 2.6% in the December quarter. This was well below levels seen in the United States and Britain, and well within the RBA’s target band of 2-3%.
“The recent lift in inflation has brought us closer to the point where inflation is sustainably in the target range. But we are not yet at that point,” he said.
“We can be patient in a way that countries with substantially higher rates of inflation cannot,” he added. “Given the outlook, though, it is plausible that the cash rate will be increased later this year.
But he did concede that given the outlook, “it is plausible that the cash rate will be increased later this year”.
Dr Lowe previously indicated the bank’s accommodative monetary setting would remain in place until at least 2023 but that stance has gradually weakened as inflation has edged higher.
He also conceded there could be a risk in waiting too long on rates should inflation expectations become unanchored, but there were also risks in going too early.
In particular, Australia was near to achieving a jobless rate under 4% for the first time since the 1970s and Dr Lowe was worth waiting to ensure this outcome.
The unemployment rate hit a 13-year low of 4.2% in January despite an outbreak of the Omicron variant, and Lowe said the high level of vacancies suggested further jobs growth ahead.
Recent floods in Queensland and NSW would be a temporary drag on growth with a boost to prices of fruit and vegetables, but the RBA still expected the national economy to expand by aa solid 4.5% over the year.
