© Reuters. FILE PHOTO: Two women walk next to the Reserve Bank of Australia headquarters in central Sydney, Australia February 6, 2018. REUTERS/Daniel Munoz/File Photo
SYDNEY (Reuters) – Australia’s top central banker on Tuesday flagged a lot more policy tightening ahead rates that were still “very low” and it was important that higher inflation did not feed into public expectations and wage claims.
Reserve Bank of Australia (RBA) Governor Philip Lowe said price pressures continued to build both globally and domestically and inflation was now seen reaching 7% by the end of the year, up from a previous forecast of 6%.
That would be the highest pace in the decades and far above the RBA’s long-term target band of 2-3%.
“As we chart our way back to 2 to 3% inflation, Australians should be prepared for more interest rate increases,” warned Lowe in a speech. “The level of interest rates is still very low for an economy with low unemployment and that is experiencing high inflation.”
The official cash rate is currently at 0.85% having been lifted by 50 basis points earlier this month following an initial quarter-point hike in May.
Markets are priced for another half-point increase in July and then a string of rises to take rates as high as 3.75% by the end of the year.
That would be one of the most aggressive tightening cycles on record and would take rates well above the 2.5% level that Lowe has indicated was around neutral for the economy.
“I want to emphasizee though that we are not on a pre-set path,” Lowe emphasized on Tuesday. “How fast we increase interest rates, and how far we need to go, will be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labor market.”
In particular, the RBA would be watching how household spending responded to rising borrowing costs given real wages were falling and house prices were easing from their highs.
Still, Lowe said it was important that inflation expectations remained anchored around 2-3% and that higher prices now did not feed through to expectations of rising inflation in the future.
“Higher interest rates have a role to play here, by helping ensure that spending grows broadly in line with the economy’s capacity to produce goods and services,” said Lowe.