RBA governor expects inflation to moderate over next 18 months

SYDNEY – Reserve Bank of Australia Governor Philip Lowe said he expects the current perfect inflation storm to ease over the next 18 months and the central bank will only raise interest rates when it is confident that inflation will not slide. again.

Mr Lowe said on Tuesday: “Supply chain congestion and unprecedented demand for goods will ease as consumer habits normalize from their COVID tilt away from services and towards consumer goods and housing materials.

Recalling his view that the market is misaligned on valuation when interest rates rise in 2022, Lowe said this makes wage growth an important indicator to determine whether inflation is likely to be sustainable. or not. The RBA wants inflation to be sustainable in the 2%-3% range before it opposes an increase in the cash rate from the current record low of 0.1%.

Lowe said a salary increase of 3% or more is not within the RBA’s target. Instead, it is a guide to gauge whether inflation is sustainable in the face of relatively low unemployment.

“We have little historical experience with how the Australian labor market works with an unemployment rate of 4%,” Lowe said in Sydney in a speech to economists.

Australia’s unemployment rate rose to 5.2% in October from 4.6% in September as job seekers increased along with the easing of Covid-19 lockdown orders in Australia’s most populous state. country. The RBA expects it to drop to 4.75% by the end of 2021 before falling to 4.0% two years later.

Australia’s annualized average inflation rate cut rose to 2.1% in the September quarter, hitting the RBA’s 2%-3% target range about a year earlier than expected. The RBA then raised its year-end forecast to 2.5% from 1.75%, but only predicted core inflation of 2.5% by the end of 2023.

“If this materializes, it will be the first time in almost seven years we will be at the midpoint of the target range,” Lowe said. “This in itself does not guarantee an increase in the cash rate. Much will depend on the trajectory of the economy and inflation at that time. “

Lowe acknowledges that factors including the reopening of Australia’s international borders mean the pace and sustainability of inflation are unclear and that a number of outcomes are likely.

However, he said the economy and inflation will behave very differently than the RBA’s current forecast for a rising cash rate in 2022.

“It is still plausible that the first increase in the cash rate will not be before 2024,” Lowe said. | RBA governor expects inflation to moderate over next 18 months


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