RBA Lowe: How High, How Quickly Rates Need To Go Depends On Data, Outlook

• Published on
• 08 Sep 2022, 01:10 PM

--How high interest rates need to and how quickly depends on data, outlook
--Conscious of lags in operation of monpol and that rates have increases very quickly
--All else equal, case of slower pace of rates rises gets stronger as level of rate rises
--Repeats twice: Price stability is necessary for strong economy, sustained full employment
--Delivering medium-term price stability is fundamental
--Important current surge in inflation is temporary
--Global slowing would make soft landing in Australia harder
--Shifts in inflation expectations, psychology will make navigating narrow path very difficult, if not impossible
--Recent data continues to suggest resilience in consumer spending
--Lowe explains reasons for “a very large” inflation surprise since last year
--Worth watching “inflation psychology” that is not easily captures in standard models
--Some evidence inflation psychology shift occurring which is contributing to inflation pick-up
--Worth examining arguments for/against to 2-3% nominal anchor; notes others have 2%

By Sophia Rodrigues

(Sydney, September 8, 2022)—The Reserve Bank of Australia expects further increases in interest rates but how high and how quickly it needs to go will be guided by the incoming data and evolving outlook for inflation and the labor market.

Governor Philip Lowe made the comments in a speech Thursday at the Anika Foundation event on the topic, “Inflation and the Monetary Policy Framework.”

The tone of the speech was hawkish, with Lowe talking about “price stability” several times, and at least twice repeating that “price stability is necessary for a strong economy and a sustained period of full employment. So, it is important that we achieve this.”

In the speech, Lowe talked about inflation psychology, explaining that it is not easily captured in the standard models but is important for inflation.

He said there is some evidence that shifts in inflation psychology is already occurring which is contributing to the strength of the pick-up in inflation.

“So, it is something to watch.”

Elsewhere, he said task of navigating the narrow path “will be very difficult, if not impossible” if workers and businesses come to expect higher inflation, and wages growth and price-setting behaviour adjusts accordingly.

Lowe talked about the “very large” inflation surprise since last year, flexible inflation targeting and recent monetary policy.

When talking about flexible inflation targeting, Lowe touched upon the recently announced RBA review, saying it is worth examining the arguments for and against a change to the nominal anchor.

Lowe said it would be helpful to look “whether 2 to 3 per cent is the appropriate nominal anchor and operating definition of ‘price stability’.”

“Many other countries have chosen 2 per cent as their nominal anchor,” he noted.

On current monetary policy, Lowe said that all else equal, the case for a slower pace of increase in interest rates becomes stronger as the level of the cash rate rises.

But his next comment suggested the RBA hasn’t decided if it has reached a point where it needs to slow the pace.

“How high interest rates need to go and how quickly we get there will be guided by the incoming data and the evolving outlook for inflation and the labour market,” he said.

--Contact: Sophia@centralbankintel.com