‘A very high number’: Reserve Bank of Australia governor expects inflation to hit 7% by end of year | Australian economy
The Reserve Bank governor, Philip Lowe, has warned Australians to be prepared for higher interest rates, saying inflation will likely reach 7% by the end of the year and it must be brought under control.
In his first public appearance since the RBA raised the cash rate by a larger than expected 50 basis points at last week’s board meeting, Lowe said on Tuesday night he was predicting inflation to rise to 7%. That compares with current inflation of 5.1%.
“By the end of the year, I expect inflation to get to 7%,” Lowe said in a rare television interview on ABC’s 7.30.
“That’s a very high number and we need to be able to chart a course back to 2-3%. I’m confident we can do that but it’s going to take time. With inflation being as high as it is, and with interest rates as low as they are, we thought it was important to take a decisive step to normalise monetary conditions, and we did that at the last meeting.”
The governor reiterated it was reasonable to expect the cash rate would get to 2.5% at some point – but he said it would be driven by events.
The official cash rate currently stands at 0.85% after the RBA raised it at consecutive board meetings from a record low 0.1%.
It was only last year the RBA had been expecting to keep the cash rate low until 2024, but Lowe said that was never a promise.
“The economy didn’t evolve as we expected. It’s been much more resilient and inflation has been higher. We thought we needed to respond to that,” he said on Tuesday.
Lowe said the economy was in remarkable shape with the unemployment rate at a 50-year low, households having built up financial buffers of around $250bn and the number of people falling behind on their mortgage repayments actually declining.
His comments came as global share markets are in turmoil fearing the US economy could fall into recession if the Federal Reserve raises interest rates aggressively to combat its own inflation problem. US inflation is at 8.6%, its highest level in 40 years.
But Lowe is confident the Australian economy will continue to grow strongly over the next six to 12 months. “There is still a bounce back from all the Covid-19 restrictions, people are spending in a way they weren’t able to do last year,” he said.
Lowe said there was a big backlog of construction work to be undertaken and the number of job vacancies was extraordinarily high.
“So people can be confident the jobs will be there and in that environment people will keep spending,” he said.