- Governor Philip Lowe of the Reserve Bank of Australia said that while inflation in the country may be “past its peak,” there are still indicators that show inflation is continuing.
- The central bank’s target for inflation is between 2% to 3%.
Lampposts in front of the Reserve Bank of Australia (RBA) building in Sydney, Australia, on Monday, Feb. 6, 2023.
Bloomberg | Bloomberg | Getty Images
The Reserve Bank of Australia on Tuesday again defied market expectations, raising its benchmark rate by 25 basis points to 4.1%.
Economists polled by Reuters widely expect the central bank to keep rates steady. As a result, Australian stocks fell further on the news, with the S&P/ASX 200 last trading 1% lower. The Australian dollar rose 0.73% to 0.6667 against the US dollar shortly after the decision, with the central bank grappling with the latest inflation rate 6.8% for the month of April.
Governor Philip Lowe of the Reserve Bank of Australia said that while inflation in the country may be “past its peak,” there are still indicators that show inflation is continuing.
“Recent data indicate that risks to the inflation outlook have increased and the Board has responded to this,” Lowe said in Tuesday’s statement.
“A further increase in interest rates is to provide more confidence that inflation will return to target within a reasonable time frame,” Lowe added.
The central bank’s target for inflation is between 2% to 3%.
“If high inflation becomes entrenched in people’s expectations, it will be very costly to reduce later, involving higher interest rates and a greater increase in unemployment,” said Lowe.
The governor’s statement added that further rate increases may be necessary to lower the country’s inflation rate, adding that it “will depend on how the economy and inflation develop.”
“Some further tightening of monetary policy may be necessary to ensure that inflation returns to target in a reasonable timeframe… The Board will continue to pay attention to developments in the global economy, trends in household spending , and the outlook for inflation and the labor market,” Lowe said.
The central bank also highlighted the daunting task of averting a recession in the Australian economy.
It said in the statement: “The Board still seeks to keep the economy on an even keel as inflation returns to the 2-3 percent target range, but the path to achieving a soft landing remains narrow. “
HSBC’s Paul Bloxham added that the RBA’s aim of achieving a soft landing, or ending its hiking cycle without pushing its economy into recession, was becoming more difficult.
“I think it makes the narrow path that the RBA governor is referring to … that narrow path is getting narrower and narrower as we speak,” he told CNBC’s “Capital Connection” on Tuesday.
Indeed, Tuesday’s decision may indicate that a hard landing is a risk the central bank is willing to take to tame high levels of inflation.
“I think it’s getting harder and harder to believe that Australia won’t have more of a slowdown to reduce inflation, but the RBA has clearly decided now that that’s a risk they’re willing to take,” Bloxham said.
