SYDNEY — Reserve Bank of Australia Gov. Philip Lowe said he expects the current perfect storm of inflationary forces to moderate over the next 18 months, and that the central bank will only raise interest rates when it is confident that inflation won’t slip again.
Supply-chain congestion and unprecedented demand for goods should ease as consumption habits normalize from their COVID-driven tilt away from services and toward consumer goods and housing materials, Lowe said Tuesday.
Reiterating his view that markets are erring by pricing in an interest-rate rise in 2022, Lowe said this leaves wages growth as a key indicator in defining whether inflation is likely to be sustainable. The RBA wants to see inflation sustainably within a 2%-3% range before it countenances raising the cash rate from its current record-low 0.1%.
Lowe said wages growth of 3% or more isn’t among the RBA’s targets. Rather, it is a guidepost in assessing whether inflation is sustainable against a backdrop of relatively low unemployment.
“We have little historical experience as to how the Australian labor market works at an unemployment rate of 4%,” Lowe said in Sydney in a speech to economists.
Australia’s unemployment rate jumped to 5.2% in October from 4.6% in September as the number of people seeking work rose with the easing of Covid-19 lockdowns in the country’s most populous state. The RBA expects it to moderate to 4.75% by the end of 2021 before drifting lower to 4.0% two years later.
Australia’s annual trimmed mean inflation rate rose to 2.1% in the September quarter, hitting the RBA’s 2%-3% target band about a year earlier than expected. The RBA subsequently raised its year-end forecast to 2.5% from 1.75%, but only anticipates underlying inflation of 2.5% by the end of 2023.
“If this comes to pass, it would be the first time in nearly seven years that we will be at the mid-point of the target range,” Lowe said. “This by itself, does not warrant an increase in the cash rate. Much will depend upon the trajectory of the economy and inflation at the time.”
Lowe conceded that factors including the reopening of Australia’s international borders meant the pace and sustainability of inflation was unclear and that several outcomes were possible.
Yet he said the economy and inflation would have to turn out very differently to the RBA’s current forecasts for the cash rate to rise in 2022.
“It is still plausible that the first increase in the cash rate will not be before 2024,” Lowe said.
This post was originally published on Market Watch
