As inflation continues to soar in Australia, the Governor of the Reserve Bank of Australia (RBA) has warned that more interest rate hikes are inevitable. Philip Lowe said that at least two more rate increases are needed to help contain inflation, adding that the speed at which inflation rocketed out of control shocked everyone.
Lowe said that the pace and size of the interest rate increases would be partly based on the speed at which wages pick up. In a recent speech, he said that without raising interest rates again, there was a risk of ‘inflation psychology’ taking hold.
Speaking to the Anika Foundation, Lowe said: “The board expects that further increases in interest rates will be required over the months ahead. 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 also said: “High inflation is a scourge. 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.”
Base rate at highest level in seven years
Lowe spoke just days after the RBA increased the base rate by 50 basis points, taking the base rate to 2.35%. This puts it at the highest level since the early part of 2015. The rate has now increased on five consecutive occasions.
Like other central banks, the RBA has said it is committed to aggressive action in tightening monetary policy to try and bring inflation under control. Lowe’s comments come amid calls for him to resign, but he confirmed he has no plans to do this.
Lowe was accused of backtracking on a promise that the RBA would not lift the cash rate until 2024. However, he said this remark was made in 2021 and was ‘highly conditional’.
He said: “I did not promise interest rates would not go up until 2024. I know many people interpret my previous statements as saying that. But if you look back carefully, what we said was we thought the pandemic was going to have long-lasting effects on the economy.”
Financial experts from ANZ have predicted a further base rate increase of 0.5% in October. However, they have lowered predictions for November to 0.25%, followed by an additional 0.25% hike in December, which would take the base rate to 3.35% by the end of this year.