RBA Needs To Chart Credible Path To Bring Inflation To 2-3%, Says Lowe

The Reserve Bank of Australia should chart a credible path to bring inflation back to 2-3 percent range without hurting the economy and the labor market, Governor Philip Lowe said Wednesday.

Although it is possible to do this, but the path ahead is a narrow one and it is clouded in uncertainty, Lowe said at the Australian Strategic Business Forum in Melbourne.

Lowe said that the RBA is committed to ensuring that the current period of higher inflation is only temporary and it will do what is necessary to bring inflation back to target.

If people believe that higher inflation will persist, it will be harder to return inflation to target – doing so would require higher interest rate and a sharper slowing in spending.

He cited interruptions to global supply chains, Russia’s invasion of Ukraine and the strength of demand in many economies as factors that pushed up inflation to the current level.

Lowe said the central bank over-insured the economy during the pandemic. “Some people might conclude that too much support was provided by governments and central banks,” said Lowe. But it is important to remember the context in which this support was provided.

While this approach avoided some damaging long-term scarring, it has contributed to the current inflationary pressures, he noted.

Further, the governor said the board had an extended discussion of the neutral interest rate over the most recent meeting. It is the real interest rate that is neither stimulatory nor contractionary.

Lowe said if the 2.5 percent midpoint of the inflation target is taken as a reasonable estimate of medium-term inflation expectations, this suggests that the neutral nominal rate is at least 2.5 percent.

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