The Australian central bank’s monthly meetings give it flexibility to respond quickly in the event interest rates are pushed too high or are not high enough, Governor Philip Lowe said, while adding his current assessment is that more work needs to be done.
(Bloomberg) — The Australian central bank’s monthly meetings give it flexibility to respond quickly in the event interest rates are pushed too high or are not high enough, Governor Philip Lowe said, while adding his current assessment is that more work needs to be done.
“The RBA and many other central banks are managing two risks,” the Reserve Bank chief said in opening remarks at his second session of parliamentary testimony on Friday. “One is the risk of not doing enough, which would result in high inflation persisting and then later proving very costly to get down. The other is the risk that we move too fast, or too far.”
Australian bonds initially rebounded after Lowe’s testimony emphasized the RBA’s capacity for flexibility. They then fluctuated as the governor during Q&A, stressed the centrality of the fight against inflation and highlighted concerning areas of fourth-quarter CPI.
Three-year yields were at 3.49%, after touching as high as 3.51%. The yield has climbed seven basis points this week.
Lowe, who wants to hold onto the extraordinary employment gains of recent years, reiterated that more rate hikes will be needed after 3.25 percentage points of hikes since May.
“The board expects that further increases will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary,” Lowe said.
He wasn’t sure how much higher they need to go, saying that will depend on how the global economy unfolds, domestic household spending and the outlook for inflation and jobs.
The RBA’s expectation of further hikes followed CPI data showing the key core inflation gauge soared 6.9% in the final three months of 2022, exceeding the central bank’s forecast of 6.5%.
“That is a big difference,” Lowe said of the result, citing it as a key factor in the change in policy messaging between the December and February meetings. The central bank turned hawkish this month after saying in December it had considered pausing its tightening cycle.
“Given there is a significant demand element to inflation, we need to respond to that with further monetary policy and we need to make that clear to the community that we were not done yet,” Lowe said.
The governor reiterated that he wants to ensure that this period of high inflation is only temporary. Even so, the central bank forecasts core inflation will only return to the top of its 2-3% target at end-2024.
What Bloomberg Economics Says…
“Questions around the pace of hikes reveal a challenge that the RBA has faced in previous tightening cycles — how far, how fast, and how best to deliver policy tightening”
— James McIntyre, economist
Money markets reckon the RBA will hike three more times this year to take the cash rate to 4.1% in September, from 3.35% at present, while economists’ median estimate is a peak of 3.85%.
Labor market strength has been a key reason why the central bank anticipates Australia can avoid a recession even as borrowing costs are raised to pull down inflation.
But data Thursday showed the jobless rate climbed to an eight-month high of 3.7% while employment fell for a second straight month.
The governor said his overall assessment was that the labor market is “still very tight,” adding that it was hard to interpret December and January data due to seasonal factors.
He said they would likely have to reassess the policy and economic outlooks if there was another month of weak employment.
Lowe’s appearance comes amid a mounting backlash over the RBA’s communications during the current tightening cycle, the most aggressive in more than three decades.
On Wednesday, in his first public appearance of the year, Lowe brushed aside much of the criticism as “noise” that comes with any tightening cycle, saying the board was unaffected and remained determined to crush inflation.
–With assistance from Garfield Reynolds.
(Adds comments on inflation, employment, updates market reaction.)
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