RBA Says Underlying Inflation at 2.5% Mid-Point Would Not Warrant Rate Rise

Reserve Bank of Australia Governor Lowe in giving a speech after today’s release of the RBA November meeting minutes addressed what it would require for a rate rise in Australia. He spoke of varying inflation degrees and the difference domestically and globally.  

Australia Inflation Rate

Reserve Bank of Australia Governor Lowe speech:  Recent Trends in Inflation 

Address to the Australian Business Economists (ABE)
Online and Sydney – 16 November 2021

 Speech Headlines via Reuters 

  • Latest data, forecasts do not warrant a rate rise in 2022
  • Economy, inflation would have to turn out very differently for the board to consider a hike next year
  • Still plausible first increase in the cash rate will not be before 2024
  • Could be a case for hike before 2024 if inflation rises faster than expected
  • Underlying inflation at 2.5% mid-point would not warrant a rate rise
  • Need to see underlying inflation well within 2-3% range and confident it will stay there
  • A sharp rise in underlying inflation would have different policy implications to a slow drift up
  • Inflation pressures in Australia are more muted than globally
  • Yet to see a broad-based pick-up in wages growth in Australia 
  • Our business liaison suggests most retain a strong cost control mindset
  • Energy prices in Australia trending lower due to wind, solar capacity
  • Likely global inflation pressures will moderate over next 18 months as demand/supply adjusts

From Governor Lowe’s Speech:

Inflation in Australia

I would now like to turn to Australia.

Many of the factors that have caused inflation to rise elsewhere are also at play in Australia, though most of these are more muted here. There are also significant differences as well, which I will discuss in a moment.

As in the rest of the world, Australia has experienced a lift in inflation, although it is less pronounced than in many other countries. In underlying terms, inflation was 0.7 per cent in the September quarter and 2.1 per cent over the year to the September quarter (Graph 10). While this outcome was higher than expected, it is important to remember that at 2.1 per cent, underlying inflation is only just above the bottom of the 2 to 3 per cent target band and remains lower than the average for the past three decades.

Some background

The recent concerns about inflation have come after many years of inflation being below central banks’ targets. This first graph shows the gap between the average inflation rate over the 10 years to the end of 2019 and the target rate (Graph 1). The picture is pretty clear: the undershooting of inflation targets has been a common, though not universal, experience. The reasons for this are complex but include increasing globalisation, advances in technology and changes in the way labour markets work.

Now in 2021, the common experience is higher inflation. CPI inflation has increased in most advanced economies, with a number now experiencing headline inflation rates above 4 per cent (Graph 2). Asia is an exception, though, with inflation rising by only a small amount in Japan and China. So not every country is in the same position.

Headline Inflation

In those countries experiencing higher inflation, central banks and investors are asking themselves how persistent this increase will be. Is it just a temporary development associated with the pandemic? Or is it the start of a more persistent change in inflation dynamics in our economies?

IMF Inflation Forecasts

Most central banks and international organisations have concluded that the increase in inflation is likely to be only temporary. This is evident in the next graph, which shows the latest inflation data for a range of countries, together with the IMF’s forecast for inflation in 2022 (Graph 3). In most economies, inflation is expected to be much lower next year, with inflation rates generally clustered around 2 per cent.

A related question is to what extent policy interest rates will have to increase to achieve and sustain the forecast reduction in inflation rates? Current market pricing suggests that investors expect that most central banks in advanced economies will increase their policy interest rates by the end of 2022, with some – including New Zealand, Norway and South Korea – already having done so (Graph 4). It is noteworthy that only a modest increase in policy interest rates is anticipated, with rates expected to plateau at what would still be historically low levels. This is consistent with the view that the current increase in inflation is only transitory and that a period of contractionary monetary policy will not be required to return inflation to target.

To read the complete speech from Gov Lowe please visit the RBA Source listed below

Source: RBA

From The TradersCommunity Australian News Desk