Reserve Bank of Australia Governor Phillip Lowe is set to continue increasing the official cash rate in an attempt to tackle “evil” inflation that is slowly becoming ingrained in the economy.
Speaking in Hobart, following the RBA’s decision to again lift the official cash rate 0.25 per cent, Dr Lowe said high inflation was a scourge that needed to be reined in quickly before it starts damaging the economy.
“If this were to happen, the evil of inflation would be with us for longer and the eventual increase in interest rates needed to bring it down would be greater,” Dr Lowe said.
“This would increase the risk of a severe recession and a sharp rise in unemployment.
“It would be much better to avoid such a costly outcome, and so we have acted strongly to avoid it.
“It is for these reasons that the Reserve Bank Board will make sure that this episode of high inflation is only temporary.”
Dr Lowe said the Board’s base case remains that interest rates will need to go higher still to bring inflation back to target, and forecasts have been prepared on that basis.
“We are not on a pre-set path, though,” he said.
“If we need to step up to larger increases again to secure the return of inflation to target, we will do that.
“Similarly, if the situation requires us to hold steady for a while, we will do that.
“Given the uncertainties regarding the outlook, we will be watching very carefully how the economy and the inflation pressures evolve over the summer.”
Dr Lowe said the Board is looking to get inflation back into its 2-3 per cent target band, down from 7.1 per cent.
So far this year, the RBA has raised the cash rate from just 0.1 per cent in April to 2.85 per cent following the most recent increase – the fastest tightening cycle since 1994.
Economists are tipping the cash rate to continue to rise in December, with predictions from the major banks and economists pointing to a terminal rate nearing 4 per cent.
Dr Lowe said he understood the implications of higher interest rates, especially on those who recently purchased property.
“I understand that the higher interest rates that are needed to bring inflation under control are unwelcome by many people, especially those who have borrowed large amounts over recent times,” he said.
“At our meeting, we discussed how the higher interest rates are putting pressure on family budgets, just at the time that high petrol prices and grocery bills are also squeezing budgets.
“We are conscious of this and are certainly taking it into account.”
According to Dr Lowe, the RBA is on a “narrow path”, trying to tame inflation without sending the country into recession.
“We are conscious that interest rates have been increased by a large amount in a very short period of time and that higher interest rates affect the economy with a lag,” he said.
“If we are to stay on that narrow path, we need to strike the right balance between doing too much and too little.”
“High inflation devalues your savings,” Dr Lowe said.
“It worsens inequality in our society and it undermines our living standards.
“It hurts us all by impairing the functioning of our economy.