MNI BRIEF: Current Rates "Well Below" Neutral Says RBA

The Reserve Bank of Australia has said that the current level for official interest rates is “well below” the lower range of estimates for the nominal neutral rate, suggesting the need for further interest rate rises.

The comment was included in the minutes of the last meeting of the RBA Board, held on July 5, when the central bank hiked official rates by 50 basis points to 1.35%, the third successive increase since May.

The minutes show that the RBA had a discussion on neutral interest rates and agreed that the neutral rate framework indicated that if inflation expectations rise the level of nominal interest rates required to return inflation to the RBA’s 2% to 3% target “will be higher than otherwise,” (See: MNI STATE OF PLAY: Household Spending A Factor For RBA Hikes).

The RBA said it “remains committed” to bringing inflation back to the target, and that further steps towards this goal would be needed over the months ahead. CPI inflation in the first quarter was at 5.1%, and second quarter date is due on July 27. RBA Governor Philip Lowe has said he expects inflation to peak in the second half of the year at “around 7%.”