CANBERRA, AAP – Reserve Bank of Australia governor Philip Lowe says it is plausible that the cash rate will be increased later this year.
Addressing a business conference on Wednesday, he said he recognised there is a risk of waiting too long before lifting the rate from a record low 0.1 per cent against the backdrop of supply shocks and high inflation.
“But there is also a risk of moving too early,” Dr Lowe told the Australian Financial Review business summit.
“Australia has the opportunity to secure a lower rate of unemployment than has been the case for some decades. Moving too early could put this at risk.”
He said the recent lift in inflation had brought the economy closer to the point where inflation was sustainably in the two to three per cent target range.
However, this comes on the back of very large disruptions to supply chains, some of which are still expected to ease.
Wages growth is also higher than it was before the pandemic, which was associated with inflation being persistently below target.
“In these circumstances, we have scope to wait and assess incoming information and see how some of the uncertainties are resolved,” Dr Lowe said.
“We can be patient in a way that countries with substantially higher rates of inflation cannot.”
Annual inflation currently sits at 3.5 per cent, less than half the rate in the United States.
He said data available for the March quarter so far suggests a continuation of the positive growth seen in the December quarter, despite the setback caused by the Omicron outbreak.
The economy expanded by 3.4 per cent in the December quarter, and one of the fastest rises on record.
While the flooding in eastern Australia is causing severe disruptions in some areas, Dr Lowe still expects the economy to increase by around 4.25 per cent this year,
But despite this positive outlook, he said there are two main sources of uncertainty – COVID-19 and the tragic war in Ukraine,
He said it is difficult to know what the full implications from the Ukraine conflict are at this stage, but so far it has resulted in higher commodity prices.
“For the countries in Europe, this rise in commodity prices represents a negative shock to their terms of trade and thus to their national income,” Dr Lowe said.
“Australia is in a different position because we export many of the commodities whose prices are rising. This means that our terms of trade will rise over the months ahead, which will provide a boost to our national income.”
But he said the rise in global oil prices is causing higher petrol prices at the bowser, which will eat into household budgets, push up costs for many businesses and crimp spending in some areas.
“Given this, I expect that most of this extra national income will be saved, rather than flow through into higher spending,” he said.