RBA says further rate hikes as interest rates remain ‘very low’

© Reuters. FILE PHOTO: Two women walk next to the Reserve Bank of Australia headquarters in central Sydney, Australia, on February 6, 2018. REUTERS/Daniel Munoz/File Photo

SYDNEY (Reuters) – The governor of the Reserve Bank of Australia said on Tuesday that further policy tightening was ahead as interest rates remained “very low” and it was important that rising inflation would not affect public expectations and wage demands.

Reserve Bank of Australia (RBA) governor Philip Lowe said global and domestic price pressures continued to build, with inflation now expected to hit 7 per cent by the end of the year, up from an earlier forecast of 6 per cent.

That would be the fastest growth rate in decades and well above the RBA’s long-term target range of 2-3%.

“As we plan to get back to 2 to 3 per cent inflation, Australians should brace for more rate hikes,” Lowe warned in a speech. “For a country with low unemployment and high inflation for economies, interest rates are still very low.”

The official cash rate, currently at 0.85%, was raised by 50 basis points earlier this month after an initial 25 basis point increase in May.

Markets are pricing in another 0.5 percentage point gain in July, followed by a string of gains that will take rates as high as 3.75% by the end of the year.

It would be one of the most aggressive tightening cycles on record and interest rates would be well above the 2.5% level that Lowe said was the economy’s neutral level.

“I want to stress that we’re not on a pre-set path,” Lowe stressed Tuesday. “How quickly we raise rates and how far we need to go will depend on incoming data and the board’s assessment of the outlook for inflation and the labor market.”

In particular, the RBA will be closely watching how household spending responds to rising borrowing costs, given that real wages are falling and house prices are falling from their highs.

Still, Lowe said it’s important that inflation expectations remain around 2-3%, and higher prices now don’t reflect expectations of rising inflation in the future.

“Raising interest rates can play a role here by helping to ensure that spending increases roughly in line with the economy’s ability to produce goods and services,” Lowe said.

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