Inflation to peak at 7%

Interest rates are “still very low”, according to Reserve Bank of Australia (RBA) governor Philip Lowe, but the pace of rate rises will be driven by multiple macroeconomic factors.

In a speech in Sydney, Lowe said Australian consumers should be prepared to see more interest rate increases after already seeing two consecutive monthly rises.

Rates were increased by 25bps in May and then by 50bps in June to currently stand at 0.75%.

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Lowe said: “As we chart our way back to 2%-3% inflation, Australians should be prepared for more interest rate increases. The level of interest rates is still very low for an economy with low unemployment and that is experiencing high inflation.

“I want to emphasise though that we are not on a pre-set path. How fast we increase interest rates, and how far we need to go, will be guided by the incoming data and the board’s assessment on the outlook for inflation and the labour market.

“The board will be paying close attention to developments in the global economy, the evaluation of labour costs and how household spending is responding to higher interest rates.”

Headline inflation was 5.1% in the March quarter while underlying inflation was 3.7%, this was above the RBA’s target but below other countries such as the US and UK which inflation was approaching 10%.

However, Lowe did not expect inflation to reach this rate in Australia with inflation to peak at around 7% in December then decline by early next year.

The rising inflation was being driven by factors such as supply chain disruption, increased oil prices, the Russian invasion of Ukraine and shortages for energy and food.

“As important as these global influences are, they do not provide a full explanation for higher inflation in Australia. Increasingly, domestic factors are also at play. Following the strong recovery from the pandemic, growth in domestic spending is now testing the ability of the economy to meet the demand for goods and services.

“This is particularly evident in the labour market, with many firms reporting that the availability of labour is a significant constraint on their ability to operate and/or expand,” Lowe said.

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