The Reserve Bank board is committed to doing what is necessary to ensure inflation returns to the two to three per cent target and households should be prepared for further interest rate rises, governor Philip Lowe has warned.
But he talked down the possibility of a recession, saying they did not see one “on the horizon” and that the fundamentals of the economy were strong.
“But if the last two years has taught us anything, you can’t rule anything out.”
“Fundamentally, we are strong and the position of the household sector is strong and firms want to hire people at record rates.
“It doesn’t feel like the precursor to a recession, and interest rates, while they have gone up, they are still low. The cash rate is still less than 1% at a time when unemployment rate is at a 50-year low.”
He said while rising inflation had been driven by global events, increasingly domestic factors in Australia were coming into play.
“Following the strong recovery from the pandemic, growth in domestic spending is now testing the ability of the economy to meet the demand for goods and services,” Dr Lowe told a forum in Sydney on Tuesday.
“This is particularly evident in the labour market, with many firms reporting that the availability of labour is a significant constraint on their ability to operate and/or expand.”
Petrol prices have also risen further due to global developments and the outlooks for retail electricity and gas prices have been revised higher due to pressures on capacity in that sector.
The RBA raised its inflation forecast to a peak of around 7% in the December quarter, having earlier predicted a top of 6%.
“High inflation damages the economy, reduces the purchasing power of people’s incomes and devalues people’s savings,” Lowe told the American Chamber of Commerce in Australia event.
“It is also regressive, hurting most those who are least well equipped to protect themselves.”
As such, it is important the RBA charts a way back to the two to three per cent inflation target, although Lowe concedes this can’t be done immediately.
“Australians should be prepared for more interest rate increases,” Lowe said.
“The level of interest rates is still very low for an economy with low unemployment and that is experiencing high inflation.”
The RBA board has raised the cash rate at its past two monthly meetings by a total of 75 basis points. The second rise, a 50 basis point increase, was the largest since February 2000.
“We decided to make a bigger, 50 basis points, adjustment on the basis of the additional information suggesting a further upward revision to an already high inflation forecast,” Lowe said.
“The board also gave consideration to the fact that the level of interest rates was still very low.”
Economists are predicting another 50 basis point rise in July, which would take the cash rate to 1.35%.
“I want to emphasise though that we are not on a preset path,” the governor said.
“How fast we increase interest rates, and how far we need to go, will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labour market.”