SYDNEY (Reuters) – The Reserve Bank of Australia (RBA) governor reiterated on Wednesday that interest rates had not yet peaked, adding that he was not sure how high rates would have to rise as the central bank sought to rein in inflation, trying to navigate a path to Narrow roads for soft landings.
RBA Governor Philip Lowe told members of parliament that hitting the soft landing target and avoiding a recession depends on moderating wage growth.
Consumer price inflation hit a 32 year high in the fourth quarter despite a series of rate hikes starting in May.
“Inflation, at 7.8%, is too high. It needs to come down. That’s our number one consideration,” Lowe said.
Asked how much interest rates would have to rise, he said policymakers were keeping an open mind.
“I don’t think we have peaked yet but I don’t know how far we have to go,” he said, adding that the central bank would continue to monitor inflation, consumer spending, the global economy and wage growth .
The RBA said the U.S. is not trying to push the economy into recession and there is a narrow path to a soft landing if wage growth remains reasonable. The risk of a wage spiral that pushes wages higher is relatively low, but the cost would be high if that happened, he said.
Wages rose 3.1% in the third quarter compared with a year ago.
The central bank has raised its policy rate by 2025 basis points since May, to a ten-year high of 3. 35%.
“There is a risk that the policy tightening that has occurred does hold back spending more than we thought,” Lowe said. “We don’t have a crystal ball of total clarity.”
“But there are risks on the other side. There is a risk that we are not doing enough on rates and spending is more resilient, inflation remains high ’
“So the risks go both ways and we’re trying to navigate a narrow path. I understand why some people focus on one side of the risk, but we have to be mindful of the risk of rising inflation
Markets topped
The RBA recently implemented a rate hike on Feb 7 and said more was to come. The market reacted by raising the expected peak of the policy rate to around 4.2% from 3.6% a month ago, implying at least three more hikes.
The shocking Q4 Inflation Report released last month for January 25 showed that consumer prices were 7.8% higher than a year earlier. A closely watched measure of inflation – the trimmed average – rose 6.9%, beating the RBA’s forecast for a 6.5% rise.
The central bank later said domestic cost pressures were still strengthening, although inflation was likely to slow in the fourth quarter. This implies elasticity of future inflation.
The RBA forecasts that inflation will return to its 2% to 3% target range by the medium term2025.
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“We want to bring inflation down because it’s dangerous,” Lowe said on Wednesday. “It’s corrosive, it hurts people, it destroys income inequality, and if it stays high, it leads to higher interest rates and more unemployment.”
“Raising interest rates has been unpopular…but our job is to make sure inflation comes down and hopefully preserve the employment gains we’ve made.”
Unemployment rate for December 3.5%, near a five-year low.
