The Reserve Bank of Australia (RBA) has warned that interest rates need to be raised amid the current cost of living crisis to keep inflation in check and avoid the risk of a recession.
and speech At the Reserve Bank Board dinner in Hobart, RBA Governor Philip Lowe said the bank would “do what it takes” to bring inflation back to sustainable levels.
“[High inflation] It’s a tragedy. High inflation reduces the value of savings. It exacerbates inequality in our society and reduces our standard of living. It hurts us all by undermining the functioning of the economy,” he said.
“For these reasons, the Reserve Bank Board confirms that this episode of high inflation is only temporary.”
The consequences of not raising interest rates would be “that the inflationary curse will last longer and the eventual interest rate hike needed to bring it down will be greater,” he added.
Mr. Lowe recognized that continued rate hikes would not be welcomed by many, including families struggling with budget pressures from rising gas and food prices.
But as interest rates returned to normal levels, banks slowed the pace of rate hikes to 0.5 to a quarter of a percentage point.
But Lowe said banks would do so if the data showed a need for more aggressive rate hikes.
“We are not on a pre-set path,” he said.
Consecutive interest rate hikes amid rapid inflation
The comments come after the RBA announced seven consecutive cash rate hikes of 0.25% to 2.85% in the fastest monetary tightening cycle in almost 30 years.
Inflation hit a 32-year high of 7.3% in the September quarter.
The RBA has upgraded its forecast for peak inflation this year to 8% from 7.75% following the cash rate announcement.
Treasury Secretary Jim Chalmers also named inflation as the country’s biggest challenge, but said domestic inflation reflected the effects of the Russo-Ukrainian war.
‘Putin’s war is disrupting energy markets and sending prices skyrocketing’ Chalmers said Economic and Social Outlook Conference held in Melbourne.
“Energy prices are currently adding 0.8 percentage points to Australia’s headline inflation rate.”
According to budget estimates, Australians expect electricity prices to rise another 56% over the next two years.
He noted that while supply-side, energy-led inflation dominated the headlines, demand also contributed to higher prices. This is what RBA supports.