RBA Chief Lowe Signals More Rate Hikes

Reserve Bank of Australia Governor Philip Lowe said more interest rate increases are likely in the coming months as the central bank will do what is necessary to ensure that inflation returns to the target range over time.

Although the interest rate is still very low, the governor played down the market expectations for an increase in the rate to 4 percent by the year-end as such an action would damage household spending. Lowe also said that a recession is not on the horizon.

“As we chart our way back to 2 to 3 percent inflation, Australians should be prepared for more interest rate increases,” Lowe said in a speech to the American Chamber of Commerce in Australia on Tuesday.

“How fast we increase interest rates, and how far we need to go, will be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labor market,” he added.

Lowe said inflation is now expected to peak at around 7 percent in the December quarter. Following this, inflation will begin to decline by early next year.

Early this month, the RBA had raised the cash rate by a half percentage point to 0.85 percent, which was the biggest hike since 2000.

The minutes of the June meeting, released on Tuesday, showed that members discussed raising the cash rate target by 25 basis points or by 50 basis points. Members said both options would leave the cash rate below 1 percent, which would still be highly stimulatory and further increases would be required.

Lowe said the board will discuss another 25 or 50 basis points rate hikes at the July meeting.

Further, he said the board will closely monitor how household spending responds to higher interest rates. Households experienced a decline in real incomes because of the higher inflation and some of the large gains in housing prices over recent years being unwound.

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