MNI BRIEF: RBA's Lowe Prepares Market for More Rate Hikes

Australians should be “prepared” for more interest rate hikes as the central bank attempted to chart its way back to the inflation target but the pace of hikes was not “pre-set” and would be driven by inflation data, RBA Governor Philip Lowe said on Tuesday.

In a speech to the American Chamber of Commerce in Australia, Lowe repeated the central bank view that inflation – currently at 5.1% - would peak at just under 7% in the fourth quarter of this year before declining, helped along by rate hikes. The RBA has increased rates by 75 basis points at its last two meetings to 0.85%, (See: MNI STATE OF PLAY: RBA Turns Hawk In Biggest Hike Since 2000).

Lowe identified inflation expectations, in addition to actual inflation, as a problem for the economy, and said that dampening these expectations was one of the reasons behind the bigger 50 basis point hike at the recent June board meeting.

“The path will be easier to navigate if the inflation psychology in Australia does not shift too much,” Lowe said.

“It is important that the higher rate of inflation this year does not feed through into ongoing inflation expectations. If it did, the period of higher inflation would persist and it would be more costly to reverse.”