RBA Sees Inflation Overshooting Target as ‘Acceptable Risk’
Australia's Reserve Bank Governor Philip Lowe prepared to tolerate inflation above the upper end of his 2-3% target range.
(Bloomberg) -- Reserve Bank Governor Philip Lowe said he’s prepared to tolerate inflation above the upper end of his 2-3% target range, reinforcing signals that Australia’s first interest-rate increase remains some way off.
“The approach that we are running at the moment, waiting for the evidence, does run the risk that inflation will be above 3% for a period of time and that risk is acceptable,” Lowe said in response to questions from a parliamentary panel on Friday. “We think running that risk is an appropriate thing to do.”
Read more: RBA’s Lowe Talks Down Aussie Yields a Bit
The remarks indicate the governor is sticking to his dovish stance, in contrast with counterparts from the Federal Reserve to the Bank of England. The bond market responded by retracing some of its yield gains: 10-year Australian government securities gave back more than half of an earlier advance that had been fueled by soaring U.S. inflation.
Yet Lowe also kept his options open by reiterating during his semi-annual testimony that a rate rise is “plausible” later this year in the event wages growth and inflation accelerate further.
He spoke after U.S. inflation spiked 7.5% in January, intensifying pressure on the Fed to undertake a supersized rate increase at next month’s meeting.
In contrast, Australian core inflation only recently breached the 2.5% midpoint of the RBA’s target for the first time in seven years. Lowe indicated that one more strong inflation report wouldn’t be sufficient to alter his rate view, saying another couple would be “good to see.”
The governor reiterated the RBA’s decision to stay patient on policy is part of an effort to test how far it can drive down the jobless rate -- currently 4.2% -- before sparking rapid wages growth. The bank now estimates the rate that would trigger quicker pay gains is likely to be around the “low 4s-high 3s.”
“Lowe remains ice cool,” said Prashant Newnaha, senior rates strategist at TD Securities in Singapore. “The clear message from the RBA governor is that the bank is in no pressing rush to normalize the cash rate. Rate hikes are now less of a first-half 2022 proposition.”
Even so, economists and markets remain skeptical of Lowe’s assessment that a jobless rate below 4% will take longer to trigger faster wages growth. Most expect the RBA will again be surprised by the economy’s strength and forecast rates to begin rising in just a few months’ time.
“Where the inflation debate will heat up is how long the RBA will tolerate inflation above 3%,” said Belinda Allen, a senior economist at Commonwealth Bank of Australia, which predicts an August rate liftoff.
Lowe’s readiness to risk an overshoot “is important for the outlook for the timing of interest rate rises,” she said. “The messages around this is the board is prepared to be patient, more so than countries with higher inflation.”
Unlike on rates, the RBA has taken global cues in deciding to wrap-up its quantitative easing program in response to a strengthening economy. But the governor has said repeatedly that ceasing bond purchases doesn’t imply a tightening of monetary policy.
Lowe says the RBA will decide in May whether to reinvest the proceeds of maturing bonds. He said that it’s not a pressing issue for Australia when compared with, say, the U.S., where maturities come up every month.
“The rolloff of our balance sheet is very slow this year,” he told lawmakers. “So that’s something we’ll have to focus more on next year when there are large maturities.”
The central bank is undertaking a review of its unconventional policies and will release the findings later this year.
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