MNI: RBA’s Lowe Says Case For Slower Hikes Becoming Stronger​

Reserve Bank of Australia governor Philip Lowe opened the door to a slower pace of interest rate rises in a speech that defended the Bank's inflation-targeting framework.

The governor said the case for slowing the pace of hikes “becomes stronger as the level of the cash rate rises”, adding rates had increased “very quickly” amid a normalisation of policy back to its estimated neutral rate of 2.5%.

The Australian dollar dipped immediately after the speech, while bond yields fell sharply (See: RBA: RBA Lowe States Case For Slower Rate Hike Pace).

He said the Bank would be “guided” by incoming data in determining the pace and extent of rate rises, a refrain of language used in Tuesday’s statement accompanying a 50bps hike to 2.35% (See: MNI State of Play: RBA To Keep Hiking in Inflation Battle).

The RBA has hiked 225bps over five meetings, including four consecutive increases of 50bps. Three hikes of 25bps over the remaining meetings in 2022 would push the Official Cash Rate to 3.1% - the highest level since late 2012.

Lowe said a “critical" issue for policy was how labour demand will respond to higher inflation. He highlighted the potential for a psychology shift, noting that with prices rising it was harder to resist bigger pay rises in a tight labour market. He said there was "some evidence" this was occurring and it was "something to watch".

He was “very conscious” of lags in monetary policy, adding there would be “difficult times” for some households as mortgage rates rose.

MEA CULPA

When questioned about supply-side constraints forcing up inflation, Lowe replied that “a lot of it is demand” and higher rates were a way to “calibrate” demand.

Lowe offered a mea culpa by acknowledging the Bank’s “very large forecast miss” in assessing the inflation threat. He said forecast misses of this scale should lead to "soul-searching" by forecasters.

However, he defended the Bank’s inflation-targeting framework amid a Treasury-led review of the Bank.

"In my view, flexible inflation targeting has served Australia well and remains the best monetary policy regime for Australia. It is certainly worth examining alternatives as part of the current Review of the RBA, but I do not see a strong case for a move away from this broad approach."

However, the Governor said the review could “helpfully” assess whether the 2-3% is the appropriate nominal anchor and operating definition of price stability. He noted some economies had adopted 2% as their nominal anchor.

Lowe said quantitative tightening wasn’t on the agenda as the incremental benefit is “pretty small”.

He revealed the RBA would make commentary from its liaison program an additional chapter in its Statement on Monetary Policy from now on after acknowledging it needed to pay closer attention to developments in individual sectors.