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The RBA is all but certain to raise the cash rate again when it meets next Tuesday, but governor Philip Lowe said it wouldn't be as large as many anticipated. He said an interest-rate increase of 0.75 percentage points is “off the table” this time.
In fact, he suggested the central bank will likely consider “graduated steps” in July, implying a 0.25 or 0.5 percentage point increase.
The RBA raised Australia's official cash rate to 0.35 percent from 0.1% in early May, a more severe increase than the 15 basis point jump most experts had projected.
In June, the board raised the official cash rate by 50 basis points to 0.85%, catching experts off guard with the “super-sized” rate hike.
Dr. Lowe's latest statements seem to have poured cold water on speculations the official cash rate might reach 4% in 2022, as the RBA would have to declare at least one 0.75 percent raise.
He admitted the RBA had a “narrow path” to curb inflation without creating a recession.
He warned that a change in the nation's “inflation psychology” would drive ever-rising salaries and prices, leading to higher interest rates.
Dr. Lowe said there is a narrow route to reducing inflation without hurting the economy.
Businesses feel secure raising prices, which encourages workers to demand salary raises.
“It's not formal pay indexation, but it's indexation of a kind because individuals with high inflation expect compensation, especially with a low unemployment rate,” Dr. Lowe said.
There's a shift in the country's inflation psychology, but it's not reflected in survey-based inflation forecasts.
“If people worry we can't create a credible road back, the shift in mentality could be pretty durable, and we know where that leads.”
It causes chronic inflation, and higher interest rates and a recession are needed to reduce it.
Dr. Lowe believes inflation will begin to ease in early 2023, but it will take “a couple of years” to reach the 2-3% target.
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