Lowe: Persistent Services Inflation “Here”, Tightening Not Done

RBA Governor Lowe has spoken to the Morgan Stanley Summit regarding the “Narrow Path” that the RBA is on to get inflation back to target while keeping as many of the labour market gains as possible. But it remains “resolute” in its goal of returning inflation to target. He cited the global economy, household spending, unit labour costs and inflation expectations as the key areas that will determine future rate decisions.

• The tightening this cycle is “working” and “inflation is coming down” and while there are falling inflation pressures stemming from global markets, services prices, rents, electricity prices and unit labour costs (ULC) remain a concern.
• The decision to hike rates in June was to give “greater confidence” that inflation will return to target “within a reasonable timeframe”. It was also in response to an upside risk to inflation from persistent services inflation, which he stated is now “here” and not just an overseas phenomenon. Recent information pointed to inflation, wages and house prices being higher than assumed in the RBA’s May forecasts.
• The Board will be looking at global developments including core services and the recovery in China.
• There is a lot of uncertainty around the consumption outlook with higher rates and cost of living on one hand and high population growth, savings buffers and strong employment on the other. The RBA will look at retail sales, house prices, employment and mortgage arrears.
• ULC have a close relationship with inflation and is concerning the RBA and Lowe said that “ongoing strong growth in unit labour costs would underpin ongoing high inflation outcomes”.
• Medium-term inflation expectations from financial markets and a RBA survey of unions will be watched closely for signs that inflation is becoming entrenched.