RBA’s Lowe: Australians should be prepared for more interest rate increases

Australia’s top central banker on Tuesday flagged a lot more policy tightening in the upcoming months as rates are seen as still “very low” and it was important that higher inflation did not feed into public expectations and wage claims”.

The Reserve Bank of Australia moves to implement what it describes as a “credible” path for returning inflation to the central bank’s 2.0%-3.0% target range.

Governor Philip Lowe said in a speech Tuesday that the pace of coming interest rate increases will be determined by events in the global economy, the rate at which labor costs rise domestically, and the strength of consumer spending over coming months.

Returning inflation to the target band does not have to happen immediately, Mr. Lowe said. “We do not need to, nor can we, get there immediately. Australia has long had a flexible medium-term inflation target, which, by design, can accommodate deviations of inflation from target,” he said.

“For a number of years inflation was below target and now it is above. What is important here is that we chart a credible path back to an inflation rate of 2% to 3%.”

Lowe last week gave a television interview in which he increased the RBA’s inflation forecast to 7.0% through 2022, from a forecast of 6.0% published in May.

The path back to lower inflation will be easier to navigate if the inflation psychology in Australia does not shift too much, Mr. Lowe said in his speech.

“A lesson from the 1970s is that if an inflation shock shifts people’s expectations about the ongoing rate of inflation, it becomes harder to reverse,” he said.

“Australians should be prepared for more interest rate increases. The level of interest rates is still very low for an economy with low unemployment and that is experiencing high inflation,” he said.

The RBA raised interest rates in May by 25 basis points, and followed that with a 50 basis point increase to 0.85% in June. Given the warnings about inflation, economists expect the RBA to deliver further large increases in coming months.