(Bloomberg) -- Reserve Bank Governor Philip Lowe reiterated that Australians should be prepared for further interest-rate increases, while emphasizing that future policy moves will be shaped by incoming economic data.
Inflation is expected to accelerate to 7% in the final three months of the year and will only begin to ease back early in 2023, Lowe said in the text of a speech in Sydney on Tuesday. “The level of interest rates is still very low for an economy with low unemployment and that is experiencing high inflation.”
“I want to emphasize though that we are not on a pre-set path. How fast we increase interest rates, and how far we need to go, will be guided by the incoming data,” Lowe said.
The governor’s hawkish outlook reflects an economy operating near full capacity and being buffeted by global inflationary pressures triggered by Russia’s war on Ukraine and supply disruptions from China’s virus lockdowns. Lowe said interest rate increases worldwide, as well as in Australia, would begin to contain prices.
“The board is committed to doing what is necessary to ensure that inflation returns to the 2 to 3 per cent target range over time,” he said, reiterating earlier comments.
The RBA surprised investors this month with a 50 basis-point increase in the cash rate to 0.85%, having initiated a tightening cycle in May, as inflation exceeded forecasts. Economists say local policy makers are further behind the curve than counterparts like the Federal Reserve, with money markets wagering hikes in Australia every month for the rest of the year.
Lowe said the decision to go for a bigger increase this month was driven by “additional information suggesting a further upward revision to an already high inflation forecast” and that the level of interest rate “was still very low.”
He pointed out that medium-term inflation expectations are well anchored at around 2-3%, suggesting Australians believe prices will come back down. “We want to do what we can to make sure this remains the case,” he added. “Higher interest rates have a role to play here.”
Australia’s A$2.2 trillion ($1.5 trillion) economy is running hot with the tightest labor market in almost 50 years, resilient household consumption and still-strong loan demand.
That is a key reason for Lowe’s (NYSE:LOW) confidence in the economy’s ability to weather faster rate hikes. Overnight indexed swaps now imply the cash rate will reach 3.8% by December.
Lowe said policy makers will keep a close eye on consumer spending as rates rise, while noting that household balance sheets “are generally in good shape” with additional savings of more than A$200 billion during the pandemic.
“It is also relevant that strong employment growth is continuing and that there are many job opportunities at the moment,” he said.
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