The governor of the Reserve Bank of Australia (RBA) has predicted headline inflation is likely to hit highs of 7% and peak by the end of the year, before easing in the first quarter and coming down in the second half of 2023.
“Inflation is high, too high. At the moment, it’s 5%, and by the end of the year, I expect inflation to get to 7%, and we need to be able to chart a course back to 2-to-3% inflation. I’m confident that we can do that, but it’s going to take time,” Lowe said during a rare interview on ABC’s 7.30 program on Tuesday evening.
Lowe added that in response to high inflation and low interest rates, it was important to “take steps to normalise monetary conditions”.
Early in June, the RBA raised the cash rate by 50 basis points, bringing the cash rate up to 85 basis points. It had previously raised the rate by 25 basis points in May, the first rate rise in 11 years.
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At the time, Lowe noted that a number of global factors were contributing to high inflation. These included supply chain disruptions caused by COVID-19, as well as Russia’s war on Ukraine. He also flagged domestic factors like capacity constraints, a stretched labour market and the floods.
While the RBA said that it did not expect inflation to ease in the short-term, with higher prices for electricity and gas the chief culprits, Lowe noted that inflation rates would decline and return to the 2-3% range.
When asked about what would happen if rates were increased but inflation did not subside, Lowe said he was confident “it will come down and partly it’ll come down because of the global factors”.
“Over the past year, petrol prices in Australia have gone up more than 30%. So even if the current level of petrol prices stays where it is, the rate of change goes from 30% to zero, and that will help bring down the headline rate of inflation,” he said.
“Another thing that’s going to help is that the supply side problems in the global economy are being resolved. We’ve seen just recently a big pickup in auto production of cars around the world. The chip producers are responding so the computer chip prices are coming down.
“So we’re seeing the global economy respond to some of these supply side problems that will help bring prices down, or at least the rate of inflation down. If oil prices don’t keep going up, the inflation rate goes to zero for those commodities.”
“Inflation will come down”
On the subject of higher interest rates, Lowe said it was reasonable for the cash rate to get to 2.5% and that with lower inflation, an interest rate of 2.5% would mean zero interest in inflation adjusted terms.
“An interest rate of 2.5% in inflation adjusted terms is really an interest rate of zero, which in historical terms is a very low number and I’d expect that over time we would average an inflation adjusted interest rate of more than zero,” he said, adding that the speed at which the RBA would get to this 2.5% cash rate would be determined by events.
“At each of our meetings we [the RBA] will be deciding how fast we need to go and indeed, how far we need to go.”
When asked about the stress higher interest rates would create for households — with interviewer Leigh Sales noting that financial markets point to a $1,000 monthly increase in mortgage payments — Lowe was adamant that getting inflation under control was key.
“I’m confident that inflation will come down over time, but we’ll have to have higher interest rates to get that outcome and how much higher remains to be determined.”
Lowe also noted that the household sector was resilient, and Australians had saved $250 billion over the last few years.
“That’s a lot of money and the saving rate is still high and the number of people who are falling behind their mortgages is actually declining, not rising,” he said.