March 08, 2023 (MLN): Australia's inflation is likely to remain higher than the target for a few years and a pause in interest rate hikes is coming closer, The Reserve Bank of Australia (RBA) Governor, Philip Lowe, said while speaking at the Australian Financial Review Business Summit.
Lowe highlighted that further tightening of monetary policy is likely to be required to bring inflation back to the target within a reasonable timeframe. He stressed that inflation is still too high and, while it looks to be on a declining path, it is likely to remain higher than the target for a few years.
The December quarter of 2022 saw Australia's headline inflation rate reach 7.8%, which is the highest level in more than three decades. The monthly consumer price index (CPI) indicator, published last week, showed a "welcome decline" from 8.4% in December to 7.4% in January. Despite this, Lowe argued that it will take some time before the "still too high" inflation gets back within the $2-3 target range.
Lowe also revealed that the RBA board discussed the lags in monetary policy, the effects of the large cumulative increase in interest rates since May, and the difficulties that higher interest rates are causing many households.
With monetary policy now in the restrictive territory, Lowe suggested that the board is closer to the point where it will be appropriate to pause interest rate increases to allow more time to assess the state of the economy. He noted that the board is carefully monitoring the data month to month with the flexibility to respond as needed.
"If we don't get inflation down fairly soon, the end result will be even higher interest rates and more unemployment," Lowe warned. This highlights the urgency of addressing the inflation issue in Australia to prevent further economic damage. The RBA is taking a cautious approach, weighing up the need for further interest rate hikes against the risks of pushing the economy into a recession.
The RBA's latest decision to increase interest rates to a record high of 3.6% since May 2012 marks the tenth straight increase.
It remains to be seen whether the RBA will continue to tighten monetary policy or opt for a pause in the interest rate hikes to assess the economic situation. Nonetheless, it is clear that Australia's economy faces significant challenges, particularly in the area of inflation, and decisive action will be necessary to mitigate the risks of a downturn.
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Posted on: 2023-03-08T10:42:49+05:00