The Reserve Bank governor has acknowledged the bank’s pandemic monetary policy moves, including dropping the official interest rate to record lows, contributed to high and rising inflation.
In a speech in Melbourne, Philip Lowe said the Reserve Bank had wanted to insure against the “potentially catastrophic economic consequences of the pandemic”. Early predictions forecast tens of thousands of people would die, hospitals would overflow and jobs would be slashed which would lead to “deep social and economic scarring”, he said.
Reserve Bank governor Philip Lowe said the bank will do what it takes to get inflation back down to its 2-3 per cent targetCredit:Bloomberg
During the pandemic the bank took the official cash rate to 0.1 per cent, the lowest level it’s ever been.
“This policy support meant that, as the health situation improved, households had the confidence and the ability to spend,” Lowe said on Wednesday morning.
“I recognise though that while this approach meant we avoided some damaging long-term scarring, it has contributed to the inflationary pressures we are now experiencing.”
The Russian invasion of Ukraine and pandemic-related supply chain challenges have also driven inflation to high levels right around the world, he said.
Globally, inflation is running at its highest rate in decades. In the US, UK and most of Europe, Lowe pointed out inflation was running at nearly 10 per cent.
Australia’s last inflation figure was 5.1 per cent – lower than elsewhere but higher than the Reserve Bank expected, Lowe said. He said new inflation data will be published next week and will be higher and will step up again before the end of the year.
“The policy challenge for the RBA is to return inflation to the 2–3 per cent target range while, at the same time, keeping the economy on an even keel,” he said.
Lowe said the bank isn’t necessarily working to get inflation back to that range immediately, and wants to get inflation down while ensuring the economy keeps growing and unemployment remains low.
“It is certainly possible to do this, but the path ahead is a narrow one and it is clouded in uncertainty,” he said.
The ongoing conflict in Ukraine is a source of uncertainty, but locally the uncertainty is in how people respond to higher interest rates and inflation.
Lowe said there are signs supply chain issues will resolve in coming months, and the prices of goods and commodities including wood, semiconductors, oil and wheat are already coming down.
Currently, he said surveys showed people expected higher inflation in the short term before expecting it to fall back down. That was reassuring, he said.
“The message to the community from the Reserve Bank and other central banks is ‘be confident that will come down’. We’re going to do what’s necessary to make sure that that happens,” he said.
Now the economy has recovered from the earlier effects of the pandemic, the time for record-low interest rates has passed, he said.
The RBA board had a lengthy discussion about the neutral cash rate at its last meeting, and while Lowe has previously indicated this rate could be around 2.5 per cent he said there was no hard and fast rule. The board will instead be guided by evidence around inflation and the jobs market when setting interest rates. Its next meeting is in two weeks.
“[The RBA board] is determined to do what is necessary to return inflation to 2–3 per cent,” he said.
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