AUSTRALIA’S central bank tightened monetary policy this week because of upside inflation risks to an already drawn-out return of inflation to target, Governor Philip Lowe said on Wednesday, after raising interest rates to an 11-year high of 4.1 per cent.

Some further tightening may still be required to bring inflation to heel but that would depend on how the economy and inflation evolve, said Reserve Bank of Australia (RBA)’s Lowe at the Morgan Stanley Australia Summit in Sydney.

The RBA has projected headline inflation – which is at about 7 per cent now – to return to the top of the bank’s target of 2 to 3 per cent by mid-2025, a slower path than many other economies as Lowe wants to preserve strong gains in the labour market.

“It is too early to declare victory in the battle against inflation,” said Lowe, conceding that the narrow path the central bank was trying to achieve – without crashing the economy into a recession – was likely to be bumpy.

“I want to make it clear, though, that the desire to preserve the gains in the labour market does not mean that the Board will tolerate higher inflation persisting.”

Price pressures have led the RBA to raise its cash rate by 400 basis points since last May, the most aggressive tightening campaign in modern history.

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Inflation has peaked and the April CPI reading of 6.8 per cent - which came in higher than expected – has not changed the bank’s assessment that inflation is trending lower, according to Lowe.

He also elaborated on four areas that the Board would be paying close attention to in upcoming policy decisions – global economy, household spending, growth in unit labour costs and inflation expectations.

Services price inflation in the country remained high, with rents rising quickly and electricity prices set to increase further, unit labour costs are rising briskly without a pickup in productivity, and medium-term inflation expectations could start to shift higher, said Lowe. REUTERS