Low rate environment entrenched until inflation spikes: RBA

In an address to the Aneka Foundation on Thursday (26 July), governor of the Reserve Bank of Australia (RBA) Philip Lowe discussed the link between inflation trends and the central bank’s monetary policy outlook.

Mr Lowe noted that in the years following the RBA’s monetary policy adjustment in August 2016, inflation had been on track to meet the central bank’s target of 2.5 per cent by 2019, albeit gradually.

The governor said that the RBA had opted not to accelerate inflation growth by easing monetary policy during that period, fearing that it would fuel the accumulation of debt and place further pressure on household balance sheets.

However, Mr Lowe noted that as inflation growth stagnated, the outlook for monetary policy shifted, with the RBA ultimately lowering the cash rate in June and July to re-route the trajectory of inflation.

“These two recent reductions in the cash rate will support demand in the Australian economy,” he said.

“So too will recent tax cuts, higher commodity prices, some stabilisation in the housing market, ongoing investment in infrastructure and a lift in resource sector investment.

“We also need to remember that the underlying foundations of the Australian economy remain strong.”

However, Mr Lowe conceded that it “remains to be seen” if future growth in demand will be sufficient to lift inflation in a “reasonable time frame”, adding that if growth is not sufficient, the RBA’s monetary policy board would be “prepared to provide additional support by easing monetary policy further”.

Further, the RBA governor said that in the meantime, it is “reasonable” to expect the low rate environment to be entrenched for some time to come, stating that the central bank would not consider hiking rates until inflation was closer to target.

“Whether or not further monetary easing is needed, it is reasonable to expect an extended period of low interest rates,” he said.

“On current projections, it will be some time before inflation is comfortably back within the target range.

“The board is strongly committed to making sure we get there and continuing to deliver an average rate of inflation of between 2 and 3 per cent.”

Mr Lowe concluded: “It is highly unlikely that we will be contemplating higher interest rates until we are confident that inflation will return to around the midpoint of the target range.”

The RBA’s monetary policy adjustments in June and July prompted immediate responses from the mortgage market, with lenders passing on the reductions to their home loan customers, either partly or in full.

Mortgage rates may not have hit their floor for 2019, with at least one more cash rate adjustment expected before the end of the year.

The RBA’s monetary policy board will next meet on Tuesday, 6 August.

[Related: Labour trends ‘not dramatic enough’ to force RBA’s hand]