SYDNEY :Australia’s central bank will do whatever it takes to bring inflation under control, its governor said on Wednesday, warning households to brace for the pain ahead while risks of higher inflation persisted.
Data released on Wednesday showed consumer prices rising by much more than expected in April, prompting markets to factor in more chance of a further rate rise after a surprise increase in the policy rate to an 11-year high of 3.85 per cent earlier this month.
Reserve Bank of Australia policymakers meet next Tuesday to assess the economic situation for the June interest rate decision.
Appearing before lawmakers, Governor Philip Lowe said inflation expectations were well anchored for now, but that cannot be taken for granted and entrenched inflation would lead to higher interest rates and unemployment.
The RBA has projected headline inflation to return to the top of the bank’s target of 2 per cent-3 per cent by mid-2025, a slower path than many other economies as Lowe wants to preserve strong gains in the labour market.
“We really want people to understand that we’re serious about this, that we will do what is necessary, and not to question our commitment to get inflation down. As painful as it is, we’ve got work to do there.”
Underscoring the inflation fight is not over yet, the monthly consumer price index (CPI) rose 6.8 per cent in the year to April, compared with 6.3 per cent in the previous month and market forecasts of 6.4 per cent. On a monthly basis, CPI rose by a strong 0.8 per cent from March.
Markets have nudged up the chances of a quarter-point hike next week to 32 per cent after the inflation data and ramped up bets that rates are almost certain to reach 4.1 per cent by September.
Lowe said in the hearing that one consideration behind the surprise hike in May was that households and businesses were becoming less confident of inflation going down, and policymakers wanted to reinforce the idea that the bank remains serious about its inflation target.
He conceded the success in the inflation fight is not guaranteed, and “it’s going to be painful for a while yet” for Australian households.
The RBA has warned that more rate rises may be required to bring inflation back to target by mid-2025, having raised interest rates by 375 basis points since May last year.
Risks to inflation are to the upside. Services price inflation could remain elevated due to high unit labour costs if productivity growth failed to pick up, warned Lowe.
Economic data over the past month has been on the soft side. Retail sales were flat in April as consumers cut back spending on food and dining out, while quarterly gains in wages missed forecasts and a red-hot labour market showed signs of cooling.
On the government’s review which recommended the RBA to get a new specialist board to manage monetary policy, Lowe said he thought it would be a backward step to appoint mostly economists to the new board.
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