Reserve Bank governor Philip Lowe has warned moving too early on interest rates will put historic low unemployment levels at risk, but if prices and wages rise quickly there will be a stronger case for rises.
Dr Lowe told the House Economics Committee on Friday morning the RBA was prepared to be patient to see how inflation rates continue before lifting rates from the current record low 0.1 per cent.
Reserve Bank Governor Philip Lowe.Credit:Louie Douvis
“I recognise that there is a risk to waiting but there is also a risk to moving too early,” Dr Lowe said.
“Over the period ahead we have the opportunity to secure a lower rate of unemployment than was thought possible just a short while ago,” he said. “Moving too early could put this at risk.”
The unemployment rate surprised economists by hitting 4.2 per cent in December and the current outlook from the bank is for joblessness to get to 3.75 per cent by the end of the year.
Dr Lowe said the RBA was still committed to maintaining “low and stable inflation” and will do what is necessary to achieve this goal. The central bank has an underlying inflation target of 2 per cent to 3 per cent.
“The stronger the economy and the more upward pressure on prices and wages, the stronger will be the case for an increase in interest rates,” Dr Lowe said.
However, he raised the uncertain outlook of COVID-19 outbreaks and quick changes in financial conditions globally as among the potential factors derailing the bank’s ability to sit tight.
“The pandemic is not yet behind us and it is entirely possible that there will be more outbreaks,” Dr Lowe said.
“A broader uncertainty is the extent to which other central banks will have to increase interest rates to return inflation to lower rates,” he said.
While central banks and financial markets are expecting a decline in inflation back to target levels can be reached without increasing real interest rates, he said it was possible they will need a bigger adjustment than currently expected.
“If so, this could result in an abrupt adjustment in financial conditions,” he said.
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