Lowe’s Address Continues Hawkish Tone From Post-Meeting Statement

A quick skim of the rhetoric from Governor Lowe's post-meeting address continues to read hawkish. The Governor has noted that "the evidence that we have received since then on inflation is clear. It was high. And higher than expected. On labour costs, while the various data on labour costs for the March quarter compiled by the ABS are yet to be released, other evidence received over the past month through our business liaison and various business surveys has indicated that there is now stronger upward pressure on labour costs and that this is likely to continue.”

• On balance sheet run off Lowe notes that “this contraction of our balance sheet will contribute to some tightening of financial conditions in Australia and so assist with the return of inflation to target.”
• In his guidance verse he notes that “further normalisation of interest rates will be required. In making its decisions, the Board will continue to be guided by the evidence on both inflation and the labour market. We will also continue to be flexible and responsive to changing circumstances. We will do what is necessary to ensure that inflation outcomes are consistent with the medium-term inflation target. This does not require an immediate return of the inflation rate to target because our monetary policy framework intentionally allows for flexibility and some variability in inflation from year to year. But we do need to ensure that the inflation rate tracks back to the target range of 2 to 3 per cent over time. This would be harder to achieve if the inflation psychology in Australia were to shift in a durable way due to the recent higher inflation outcomes. The decision to move today, rather than wait, should help on this front.”
• Lowe remains fleshes out various areas considerable of uncertainty. A lack of previous experience in dealing with the current labour cost and inflation mix, supply side issues & household spending are the major uncertainties flagged.
• He rounds off by reiterating that “notwithstanding these uncertainties, I expect that further increases in interest rates will be necessary over the months ahead. The Board is not on a pre-set path and will be guided by the evidence and data as it takes the necessary steps to achieve the medium-term inflation target and support full employment in Australia.”
• The RBA is definitively hawkish today and its inflation projections point to it having to play catch up.
• Q&A to follow.