‘Scourge’ inflation target rate ‘couple of years away’: RBA

While the Reserve Bank of Australia (RBA) is expecting inflation to reach around 8 per cent later this year, it will “do what is necessary” to lower it to the central bank’s “2 to 3 per cent target range”, RBA governor Philip Lowe has confirmed.

Speaking at an RBA dinner in Hobart after Tuesday’s (1 November) latest cash-rate increase announcement — taking it to 2.85 per cent — Mr Lowe said the RBA board was “resolute in its determination” to get inflation to its target rate.

In the context of how long that would take — and why — Mr Lowe outlined a time frame that Australians (mortgage holders, first home buyers and property investors et al) will have to face “evil” inflation.

“I understand that the higher interest rates that are needed to bring inflation under control are unwelcome by many people, especially those who have borrowed large amounts over recent times,” Mr Lowe said.

“At our [RBA board] meeting, we discussed how the higher interest rates are putting pressure on family budgets, just at the time that high petrol prices and grocery bills are also squeezing budgets.

“We are conscious of this and are certainly taking it into account.”

Having discussed world events and influences on the decision and the relatively fortunate position the Australian economy finds itself in comparatively post-pandemic, Mr Lowe addressed the currently pressing domestic focus.

“One challenge that is facing all Australians is high inflation,” he outlined.

“Over the year to September, the inflation rate was 7.3 per cent.

“This is the highest rate in more than three decades and we are expecting inflation to increase further to reach around 8 per cent later this year.

“After that, inflation is expected to moderate.

“This is due to the ongoing resolution of supply-side problems, a decline in commodity prices and higher interest rates, which will establish a better balance between supply and demand in the economy.

“I would like to take the opportunity to assure you that the Board is resolute in its determination to return inflation to the 2 to 3 per cent target range.

“We will do what is necessary to achieve that.”

The cost of not addressing the issue now

Earlier at the day’s RBA board meeting, Mr Lowe said they discussed “the damage” that high inflation does to people.

“It is a scourge,” he described.

“High inflation devalues your savings.

“It worsens inequality in our society and it undermines our living standards.

“It hurts us all by impairing the functioning of our economy.

“It is for these reasons that the Reserve Bank Board will make sure that this episode of high inflation is only temporary,” he explained.

The outlook was greater defined by the RBA outlining the consequences of not raising interest rates and “allowing high inflation to persist and become entrenched in expectations”.

Mr Lowe stated: “If this were to happen, the evil of inflation would be with us for longer and the eventual increase in interest rates needed to bring it down would be greater.

“This would increase the risk of a severe recession and a sharp rise in unemployment.

“It would be much better to avoid such a costly outcome and so we have acted strongly to avoid it.

“I want to acknowledge, though, that we are travelling along a narrow path here.

“The Board is seeking to return inflation to the 2 to 3 per cent range while at the same time keeping the economy on an even keel.

“It is still possible to do this, but there is a lot of uncertainty and we could be knocked off that narrow path, not least because of developments elsewhere in the world.”

Sticking to the narrow path – on tippy-toes?

Mr Lowe continued to explain at the dinner that to control inflation, the Board had already increased interest rates substantially and that it moved in “large half percentage point increments for four months”, but at this and the previous meeting, the RBA returned to more standard quarter percentage point increases.

“The earlier large increases were required to move interest rates quickly away from their pandemic levels to address the rapidly emerging inflation problem,” Mr Lowe said.

“But as interest rates moved back to more normal levels, the board judged that it is appropriate to move at a slower pace while we assessed the data, the economic outlook and the impact of the rate rises to date.

“We are conscious that interest rates have been increased by a large amount in a very short period of time and that higher interest rates affect the economy with a lag.

“If we are to stay on that narrow path, we need to strike the right balance between doing too much and too little,” he clarified.

“The Board’s base case remains that interest rates will need to go higher still to bring inflation back to target and our forecasts have been prepared on that basis.

“We are not on a pre-set path, though.

“If we need to step up to larger increases again to secure the return of inflation to target, we will do that.

“Similarly, if the situation requires us to hold steady for a while, we will do that.

“Given the uncertainties regarding the outlook, we will be watching very carefully how the economy and the inflation pressures evolve over the summer,” he advised.

[Related: Cash rate to surpass 4% in next year: survey]