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RBA Governor Philip Lowe says it’s ‘still plausible’ first rate rise won’t be before 2024

It is ‘still plausible’ official interest rates will stay on hold until 2024, but there’s some way to go until important targets are met.

Reserve Bank Governor Philip Lowe says it’s “still plausible” official interest rates will not rise before 2024, but Australia still has some way to go until inflation targets are met.

In a speech on recent trends in inflation, Mr Lowe said Australia, like the rest of the world, has experienced a lift in inflation, although it has been more muted than in many other countries.

Inflation has risen recently in most advanced economies, due to a shift in the balance of demand and supply as a result of the pandemic.

Locked down households switched their spending to goods, rather than on household services and the sudden surge in demand for goods ran up against a supply side that was not flexible enough.

This led to a sharp rise in shipping costs around the world, a drop in stock, higher delivery times and large rises in the price of many goods.

In underlying terms, Australia’s inflation was 0.7 per cent in the September quarter and 2.1 per cent in the year to the September quarter.

While higher than expected, Mr Lowe said it’s important to remember it’s only just above the bottom of the two to three per cent target band.

“The recent inflation data indicate that we are making better-than-expected progress towards our inflation objective. This is welcome news,” he said in his address at an Australian Business Economists (ABE) event on Tuesday.

“But we still have a way to go. Underlying inflation has only just returned to the target range for the first time in six years and is only just above the bottom of that target range.”

The Reserve Bank Board has said it will not raise the cash rate until inflation is sustainably in the target range.

However difficult pinpointing exactly what that range is, Mr Lowe said “we want to see underlying inflation well within the 2–3 per cent range and have a reasonable degree of confidence that it will not fall back again”.

“The inflation outlook is more uncertain than it has been for some time, but our central scenario is that underlying inflation reaches the middle of the target by the end of 2023,” he said.

“If this comes to pass, it would be the first time in nearly seven years that we will be at the midpoint.

“This, by itself, does not warrant an increase in the cash rate.

“Much will depend upon the trajectory of the economy and inflation at the time. It is still plausible that the first increase in the cash rate will not be before 2024.”

Mr Lowe said Australia’s economic recovery is back on track following the pandemic, helped by high vaccination rates.

The unemployment rate is expected to trend lower, reaching 4 per cent by the end of 2023.

The last time the unemployment rate was lower than this was in the early 1970s.

“Over the past 50 years, an inflation rate in the twos and an unemployment rate in the fours would have been considered very good outcomes,” he said.

“We need to remember, though, that we are in this place only because of extraordinary policy support. Over time, as a country we will need to refocus on the underlying drivers of growth in the economy and jobs.”

Further, Mr Lowe said the latest data and forecasts do not warrant an increase in the cash rate in 2022.

“The economy and inflation would have to turn out very differently from our central scenario for the Board to consider an increase in interest rates next year,” he said.

“It is likely to take time to meet the condition we have set for an increase in the cash rate and the Board is prepared to be patient.”

Read related topics:Reserve Bank


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