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MNI: RBA's Lowe Lays Out Future Rate Hike Factors

(MNI) Sydney

The strength of the global economy, household spending, growth in unit labour costs and overall inflation expectations will drive the Reserve Bank of Australia's future interest rate policy, according to Governor Philip Lowe.

Speaking at the Morgan Stanley Australia Summit in Sydney on Wednesday, Lowe said higher-than-expected monthly CPI and strong wages growth against a backdrop of weak productivity had driven the Board’s decision Tuesday to raise the cash rate 25bp to 4.1% (see: MNI RBA WATCH: Hawkish Stance Strengthened With 25bp Hike). “[Monthly CPI] was a higher outcome than expected, but it has not changed our assessment that inflation is trending lower,” Lowe noted. “Excluding the volatile items and travel from the monthly CPI, inflation was 5.5% in six-month-annualised terms to April, compared with 7.5% to October 2022."

He noted services price inflation in Australia remained high, rents were increasing quickly and large increases in electricity prices will occur this year. “In addition, unit labour costs are increasing briskly... These developments mean that it is too early to declare victory in the battle against inflation.”

While the Reserve had expressed a desire to protect labour market gains (see: MNI: RBA Inflation Strategy to Protect Labour Gains), Lowe noted this would not come at the expense of high inflation for long. “There is a limit to how long inflation can stay above the target band,” he added. “The longer it stays there, the greater the risk that inflation expectations adjust and the harder, and more costly, it will be to get inflation back to target.”


Lowe noted gauging the direction of future policy factors in the medium-term was difficult.

The RBA Board notably dropped "Medium-term inflation expectations remain well anchored, and it is important that this remains the case" from its official statement following the release of its decision Tuesday.

“Currently, measures of medium-term inflation expectations derived from financial market prices are around the middle of the 2–3% target range,” Lowe noted. “The same is true for professional forecasters. This suggests that financial market participants and economists expect that the RBA will be successful in containing inflation over the years ahead.”

He added measures of expected medium-term inflation for price- and wage-setters in the economy were more difficult to obtain. "One measure is from a survey of union officials that the RBA has run for many years, where we ask for the expected inflation rate over the next 5–10 years. This measure has increased significantly, after being very low for a number of years, although it is at a level seen prior to the pandemic when inflation was close to its target.”

The RBA Board will next meet on July 4.

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