RBA Lowe: Patient Until Evidence Inflation Sustainably In Target Band

• Published on
• 02 Feb 2022, 12:45 PM

By Sophia Rodrigues

(Sydney, February 2, 2022)—The Reserve Bank of Australia is prepared to be patient on monetary policy as it waits for evidence that inflation is sustainably in the target band, Governor Philip Lowe said Wednesday.

Lowe was addressing the National Press Club of Australia in a speech titled, “The Year Ahead.”

Lowe said the RBA does not have a specific definition of what “sustainably in the target range means.”

“The actual rate of inflation is relevant as are the trajectory and the outlook. So too is the breadth of price increases and the factors driving them,” he said.

The recent inflation data showing underlying inflation reaching the midpoint of the target range has not given the RBA confidence that inflation is sustainably in the target range because it has come on the back of supply chain disruptions and at a time when wages growth remains low.

“There is a range of significant uncertainties here that will take time to resolve,” Lowe said, adding, the RBA is prepared to be patient as it monitors the evolution of the various factors affecting inflation in Australia.

In the speech, Lowe explained the reasons why the RBA decided to end the bond purchase program. He conceded the bond purchases were creating some pressure points recently and while the market could accommodate further purchases, there would be a rising probability of additional strains emerging.

The end of bond purchases, however, does not represent tightening of monetary policy and does not mean that an increase in the cash rate is imminent, Lowe said.

Lowe also talked about the RBA’s latest forecasts to be released in the Statement on Monetary Policy on Friday.

The RBA expects underlying inflation to increase further due to difficulties on the supply side but to moderate thereafter as these problems resolve. The central forecast is for underlying inflation to be around 2.75% over this year and next, Lowe said.

There are a range of significant uncertainties on both inflation and wages fronts, he added.

“It is still unclear as to whether, and at what pace, the demand for goods will normalise as infection rates decline,” he said, adding, there is also uncertainty on how quickly the supply and distribution problems are resolved.

It may be the start of a period of persistently higher inflation, or it could simply be a shift in the level of prices as a result of this unique period, Lowe said.

“There are many moving parts on both the demand side and the supply side of the economy and it will take time for these various issues to be resolved,” Lowe said.

--Contact: Sophia@centralbankintel.com