MNI: RBA's Lowe Says Some Price Rises Could "Reverse"

Recent Australian inflation data had provided an “upside surprise,” but the Reserve Bank of Australia is not ruling out the possibility that some price increases will be reversed, according to RBA Governor Philip Lowe.

In a speech to the National Press Club on Wednesday Lowe said the RBA was still unconvinced that domestic inflation was sustainably within the central bank’s target range of 2% to 3%, despite fourth quarter 2021 trimmed mean inflation running at 2.6%, see: MNI STATE OF PLAY: RBA Stays Firm On Cash Rate View, Drops QE.

“There are significant uncertainties as to the persistence of the recent price pressures,” Lowe said.

“They may be the start of a period of persistently higher inflation, but they could also simply be a shift in the level of prices as a result of this unique period.”

Ahead of the release of the RBA’s Statement on Monetary Policy on Friday, Lowe said the bank was forecasting trimmed mean inflation at 2.75% for this year and for 2023. This is 50 basis points higher than the previous forecast.

On unemployment, the RBA is forecasting the level will fall from the current 4.2% to 3.75% this year and next, the lowest rate since the 1970s. The previous forecast was for 4.25% this year falling to 4% next year.

The RBA has said that inflation needs to be sustainably within its target range, and the economy needs to be enjoying full employment before it will raise interest rates from the present record low of 0.10%.

The laggard in the RBA’s forecasts, and the factor keeping the outlook dovish in comparison with other central banks, is the wages' outlook.

Lowe said wages were suffering from “inertia” and the bank’s forecast for the Wage Price Index was an increase of 2.75% this year and 3 per cent over 2023.

GDP growth has been upgraded from 4% to 4.25% this year but falling back to around 2% in 2023.