RBA Lowe Warns Of Risk Of Getting “Knocked Off” Narrow Path To Achieve Inflation Goal

--Travelling Along Narrow Path But Could Be Knocked Off, Not Least Becoz Of Global Developments
--Possible To Say Almost All Australians Who Want A Job Can Find One
--Discussed Consequences Of Not Raising Rates And Allowing High Inflation to Persist
--If Expectations Entrenched, Inflation “Evil” Will Be Longer And Need Higher Terminal
--Much Better To Avoid Such Costly Outcome, So We Acted
--To Stay On Narrow Path, Need To Strike Right Balance Between Too Much And Too Little
--Base Case Is For Rate To Go Higher, Forecasts Prepared On That Basis
--If Need To Step Up To Larger Increase, We Will Do
--If Situation Requires To Hold Steady For A While, We Will Do
--Watch Very Carefully How Economy, Inflation Pressures Evolve Over Summer
--High Inflation Is “Scourge”; Will Make Sure High Inflation Is Only Temporary

By Sophia Rodrigues

(Sydney, November 1, 2022)—For the first time, the Reserve Bank of Australia Governor Philip Lowe has acknowledged the risk that his plan to get inflation back into the target band without causing a recession could be “knocked off”, possibly by global developments.

In a speech at a dinner following Tuesday’s decision to raise the cash rate by 25bps to 2.85%, Governor Lowe reiterated his previous messages that the economy is travelling along a narrow path as the board seeks to return inflation to target while keeping the economy on an even keel.

“It is still possible to do this, but there is a lot of uncertainty and we could be knocked off that narrow path, not least because of developments elsewhere in the world,” Lowe said.

The implication of Lowe’s statement is that the RBA would not hesitate to push interest rates higher to secure the return of inflation to target if it needs to and even if it comes at the risk of causing a recession.

Lowe’s concern on inflation is evident in his comments in the speech justifying the 275bps of cash rate hikes so far in this cycle.

Allowing high inflation to persist and becoming entrenched in expectations would mean “the evil of inflation would be with us for longer and the eventual increase in interest rates needed to bring it down would be greater,” Lowe said.

Lowe also described high inflation as a “scourge” and said the RBA “will make sure that this episode of high inflation is only temporary.”

For now, the RBA is attempting to stay on the narrow path by being conscious of the need to strike the right balance between doing too much tightening and too little.

The RBA’s base case is that interest rates will need to go higher still to bring inflation back to target and the forecasts have been prepared on that basis.

Interestingly, the RBA’s statement earlier Tuesday showed inflation will remain a little over 3% over 2024, meaning it will remain above target band even after incorporating more rate hike assumptions.

Lowe said the RBA is not on a pre-set path, and “if we need to step up to larger increases again to secure the return of inflation to target, we will do that.”

“Similarly, if the situation requires us to hold steady for a while, we will do that,” he added.

The RBA will be watching “very carefully” how the economy and inflation pressures evolve “over the summer.”

Lowe reminded that the RBA has already increased interest rates substantially to control inflation. The earlier large increases were required to move interest rates quickly away from their pandemic levels and with rates at more normal levels, the board judged it is appropriate to move at a slower pace.

--Contact: Sophia@centralbankintel.com