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Cash rate won’t rise for three years: RBA

“We do not expect to be increasing the cash rate for at least three years.” That’s the state of play, delivered by Reserve Bank of Australia Governor Philip Lowe in a speech entitled ‘The Recovery From A Very Uneven Recession’.

This marks a change in tact for the RBA, which Dr Lowe acknowledged. He says the RBA will now be “putting a greater weight on actual, not forecast, inflation” in its decision-making.

“Over recent months, our communication has stated that the Board will ‘not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band’,” he told Citi’s 12th Annual Australia and New Zealand Investment Conference today.

Dr Lowe said it made sense for him to address this during the speech, “where more context can be provided, rather than make a change in the statement directly after the meeting”, noting the Board agreed with this move.

“It might seem strange to some that we are even talking about the day that interest rates increase, given that it is a long way off,” Dr Lowe continued.

“But expectations about future interest rates affect people’s decisions and asset pricing, so we seek to be as transparent as we reasonably can.

Related: RBA to cut cash rate to 0.1 per cent

“In terms of inflation, our forward guidance has been forward looking – we have focused on the outlook for inflation, not just current inflation.

“This was a sensible approach when the inflation dynamics were relatively stable and well understood. In today’s world, things are much less certain. So we will now be putting a greater weight on actual, not forecast, inflation in our decision-making.

“In terms of unemployment, we want to see more than just ‘progress towards full employment’.

“The Board views addressing the high rate of unemployment as an important national priority. Consistent with our mandate, we want to do what we can do, with the tools we have, to ensure that people have jobs.

“We want to see a return to labour market conditions that are consistent with inflation being sustainably within the 2 to 3 per cent target range.

“The Board will not be increasing the cash rate until actual inflation is sustainably within the target range. It is not enough for inflation to be forecast to be in the target range.

“While inflation can move up and down for a range of temporary reasons, achieving inflation consistent with the target is likely to require a return to a tight labour market.

“On our current outlook for the economy – which we will update in early November – this is still some years away. So we do not expect to be increasing the cash rate for at least three years.”

Read the entire speech here.

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