MNI BRIEF: RBA's Lowe Says Neutral Rate "At Least 2.5%"

Reserve Bank of Australia Governor Philip Lowe has suggested that the “neutral nominal rate” for official interest rates is at least 2.5%, but says this would move higher if medium term inflation expectations were to increase.

In a speech on Wednesday, Lowe said more interest rate rises were needed from the current level of 1.35% to crimp demand and create “a more sustainable balance between demand and supply,” (See: MNI STATE OF PLAY: Household Spending A Factor For RBA Hikes).

He was confident that inflation would come down next year, and said the RBA was prepared to take time over returning inflation to the 2% to 3% target range. Australia’s first quarter CPI inflation was 5.1% and new data, to be released next week, is expected to show a surge in the second quarter. Lowe has said he believes inflation will peak at around 7% later this year before falling back.

Lowe also defended the RBA’s inflation target policy, which is now under review by an independent panel appointed today.