By Wayne Cole
SYDNEY (Reuters) – Australia’s top central banker on Wednesday indicated a steady drum beat of interest rate rises were needed to stop a damaging inflationary cycle developing, and suggested rates could at least double from current low levels.
The warning came as the central bank faces the first independent inquiry into its operations since the 1990s, amid criticism of its inflation and policy forecasting.
In a speech at a business conference in Melbourne, Reserve Bank of Australia (RBA) Governor Philip Lowe said it was crucial that high inflation not feed through to business and household expectations and become a self-fulfilling cycle.
He suggested rates might need to rise to a neutral level of at least 2.5%, from the current 1.35%, to curb inflation which is running at a 20-year peak of 5.1%.
“For inflation to return to the 2%–3% target range, a more sustainable balance between demand and supply is needed. Higher interest rates will help achieve this,” Lowe said.
The RBA has already raised rates for three months in a row and markets are wagering on further hikes to near 3.5% by the end of the year.
Lowe’s sober outlook comes as the newly elected Labor government released details of a long-planned review of the central bank looking into its Board structure, operations and methods of communication with the public.
The RBA has faced criticism for forecasting rates would stay at an emergency low of 0.1% out to 2024, only to reverse course and start hiking in May as inflation surged past expectations.
The central bank also undershot its 2%-3% inflation target for much of the previous decade, leading the IMF to suggest that policy had been too tight during those years.
Treasurer Jim Chalmers said the review, which is due to report by March, was not about “taking pot shots” at the RBA but rather to see if there were better ways to formulate and conduct monetary policy.
Lowe said the bank’s Board and staff welcomed the review.
“The terms of reference are appropriate and the government has appointed a first-class panel,” he said. “It is an opportunity to take stock of our monetary policy arrangements and make sure that they are fit for purpose for the challenges ahead.”
Lowe also defended the RBA’s aim of keeping inflation within a 2-3% band over the long term, saying a flexible target for consumer prices was widely accepted as the right framework by central banks around the world.
(Reporting by Wayne Cole; Editing by Stephen Coates & Shri Navaratnam)
