RBA governor warns at least two more interest rate rises needed to combat ‘scourge’ of inflation

The Reserve Bank will need to lift the official interest rate at least twice more to ensure the “scourge” of inflation is contained, with the pace and size of increases determined in part by how fast wages pick up, the bank’s governor, Philip Lowe, has warned.

In a speech to the Anika Foundation on Thursday, Lowe admitted the pace of inflation had caught the RBA and other central banks flatfooted. He said they had no choice but to lift the cost of borrowing to stop an “inflation psychology” from taking hold.

“The board expects that further increases in interest rates will be required over the months ahead,” Lowe said.

“But how high interest rates need to go and how quickly we get there will be guided by the incoming data and the evolving outlook for inflation and the labour market.

“The magnitude of the pickup in inflation has come as a surprise to everyone.”

Lowe’s comments follow Tuesday’s decision by the RBA board to lift the cash rate by another 50 basis points to 2.35%. The increase was the fifth in as many meetings and raised the benchmark rate to its highest since early 2015.

The governor, who has faced calls by the Greens this week to be sacked, said the bank was “committed to doing what is necessary to ensure that inflation returns to target over time”.

“High inflation is a scourge,” Lowe said. “It damages our standard of living, creates additional uncertainty for households and businesses, erodes the value of people’s savings and adds to inequality. And without price stability, it is not possible to achieve a sustained period of low unemployment.”

Lowe blamed the mistake of starting too late to lift the cost of borrowing in part on the Russian invasion of Ukraine in December. The resulting increase in energy prices as countries imposed sanctions on Russia had jolted inflation higher, particularly in Europe and contributed to rises in Australia, he said.

“Analysis by the European Central Bank suggests that around three-quarters of the surprise in inflation in the euro area reflects unexpected developments in the markets for oil, gas and electricity,” Lowe said.

“In the UK, the Bank of England estimates that higher energy prices will directly boost CPI inflation by 6.5 percentage points this year.”

Lowe said that in Australia the 32% rise in petrol prices over the past year had directly added 1.2 percentage points to Australia’s CPI inflation.

source: theguardian.com