High inflation to persist for ‘some years’, warns Reserve Bank boss

The Reserve Bank expects annual inflation to peak at 7 per cent in the December quarter.

The Reserve Bank expects annual inflation to peak at 7 per cent in the December quarter. Photo: AAP

The governor of the Reserve Bank has warned high inflation is likely to persist for years as the global economy works through major supply chain disruptions.

But he said fears the bank will trigger a recession by raising interest rates too quickly are overblown.

Philip Lowe told an event in Sydney on Tuesday that annual inflation was likely to peak at 7 per cent in the December quarter but was unlikely to return to normal levels for “a couple of years”.

The most recent inflation data from the Australian Bureau of Statistics showed consumer prices rising by 5.1 per cent in the year to March 31 – the highest rate of inflation since 2001 and well above wages growth of 2.4 per cent over the same timeframe.

“It is going to be some years, I think, before inflation is back in the 2-3 per cent range,” Dr Lowe said, referring to the bank’s inflation target.

The Reserve Bank has lifted interest rates by a total of 0.75 percentage points in the past two months as it attempts to curb inflation by putting downward pressure on household spending – decisions that have added hundreds of dollars to monthly mortgage repayments.

Dr Lowe said higher interest rates would help to lower inflation and ease cost-of-living pressures by ensuring “spending grows broadly in line with the economy’s capacity to produce goods and services”.

The RBA governor said the bank was committed to doing what it takes to keep a lid on inflation.

“The board is committed to doing what is necessary to ensure that inflation returns to the 2 to 3 per cent target range over time,” Dr Lowe said in his prepared speech.

“High inflation damages the economy, reduces the purchasing power of people’s incomes and devalues people’s savings. It is also regressive, hurting most those who are least well equipped to protect themselves.”

Recession unlikely

After his speech to the American Chamber of Commerce in Australia, Dr Lowe was asked whether Australia was heading towards a recession as seemed increasingly likely in other advanced economies like the US.

The RBA governor said he didn’t “see a recession on the horizon here” as the economic fundamentals in Australia were strong despite high inflation and rising interest rates.

“Right at the moment, the unemployment rate is the lowest in 50 years, the participation rate is the highest ever. More working age Australians have jobs than ever before, the number of job vacancies is at a record high. Households have strong balance sheets. Our terms of trade – so this is the price our export and relative input prices – are at the highest ever.” Dr Lowe said.

“Australia has a lot of positives, so we don’t see a recession on the horizon but the last two years, if it has taught us anything, is that you can’t rule anything out.”

His speech comes amid low consumer confidence in the face of high inflation and rising interest rates.

‘Deeply pessimistic’

The ANZ-Roy Morgan weekly measure of consumer confidence rose by 1.6 per cent hours before Dr Lowe delivered his address. But the index is still deeply pessimistic.

Last week it fell to its lowest level since April 2020 and it is still well below the neutral score of 100. At 81.7, the index shows pessimists still outnumber optimists when it comes to the state of the economy.

ANZ head of Australian Economics David Plank said last week’s positive jobs numbers could have given consumers a small boost – but he noted inflation expectations were beginning to rise.

“News about the strength of the labour market may have boosted sentiment, but it remains deeply pessimistic,” Mr Plank said.

“Household inflation expectations jumped 0.3 percentage points to 5.9 per cent as average petrol prices increased over the week.

“The ‘current’ and ‘future economic conditions’ subindices dropped for a third consecutive week, as central banks across the world, including the RBA, became increasingly hawkish about bringing inflation under control, causing uncertainty about economic growth.”

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