Reserve Bank of Australia sees more rate rises, welcomes government review

AUSTRALIA’S top central banker on Wednesday reiterated that further interest rate rises would be needed to stop an inflationary cycle developing, at the same time as the bank faces the first independent inquiry into its operations since the 1990s.

In a speech at a business conference in Melbourne, Reserve Bank of Australia (RBA) Governor Philip Lowe said it was crucial that high inflation not feed through to business and household expectations.

He suggested rates might need to rise to a neutral level of at least 2.5 per cent, from the current 1.35 per cent, to curb inflation which is running at a 20-year peak of 5.1 per cent. 

“For inflation to return to the 2 to 3 per cent target range, a more sustainable balance between demand and supply is needed. Higher interest rates will help achieve this,” Lowe said. 

The RBA has already raised rates for three months in a row and markets are wagering on further hikes to near 3.5 per cent by the end of the year.

Lowe’s warning on rates comes as the newly elected Labor government released details of a long-planned review of the central bank looking into its Board structure, operations and methods of communications with the public.

The RBA has faced criticism for forecasting rates would stay at an emergency low of 0.1 per cent out to 2024, only to reverse course and start hiking in May as inflation surged past expectations. 

The central bank also undershot its 2 to 3 per cent inflation target for much of the previous decade, leading the IMF to suggest that policy had been too tight during those years.

Treasurer Jim Chalmers said the review, which is due to report by March, was not about ascribing blame but to see if there were better ways to formulate and conduct monetary policy. 

SEE ALSO

Australia to review RBA inflation target, policy tools

Lowe said the bank’s Board and staff welcomed the review.

“The terms of reference are appropriate and the government has appointed a first-class panel,” he said. “It is an opportunity to take stock of our monetary policy arrangements and make sure that they are fit for purpose for the challenges ahead.”

Lowe also defended the RBA’s aim of keeping inflation within a 2-3 per cent band over the long term, saying a flexible target for consumer prices was widely accepted as the right framework by central banks around the world. REUTERS