Reserve Bank Governor Philip Lowe has warned rate hikes are “not over” if inflation remains stubbornly high.
Speaking to the National Press Club in Sydney, he warned that the decision to keep interest rates at 3.6 percent after 10 consecutive hikes did not mean that homeowners’ troubles were over.
He outlined three key factors that will determine the future of interest rates.
These were “the” outlook for the global economy, especially in light of the recent banking problems in the United States and Switzerland”, the “strength of household consumption” and how price and wage-setting behavior responds to it.
“The decision to keep interest rates stable this month does not mean the rate hikes are over,” Dr. Lowe.
“Indeed, the Council expects that some further tightening of monetary policy may be necessary to bring inflation back to target within a reasonable timeframe. However, it decided it was prudent to keep rates stable this month to allow more time to assess the impact of interest rate hikes to date and the economic outlook.
“The Council is aware that monetary policy is operating with a lag and that the full effect of the increases has not yet been felt. It is also aware that there are major economic uncertainties at the moment. Given these delays and uncertainties, the Council judged that, with monetary policy now in a restrictive area, it was time to keep interest rates stable and collect more information.”
“This approach is consistent with our practice in previous interest rate cycles. In those earlier cycles, it was common for the board of directors to change interest rates several times, then wait a while to assess the pulse of the economy and intervene again if the situation warranted it. So it is a return to that world.”
Dr. Lowe stressed that while the increases were not welcomed by many people, they were necessary to maintain price stability in Australia.
“As inflation expectations rise, and wage and pricing behavior responds to higher inflation and interest rates, and the more prices and wages respond to a period of temporarily high inflation, the greater will be the
the need for interest rates to respond,” he said.
“The situation is a bit more complicated when supply-side issues are persistent and lead to sustained higher price increases.