Reserve Bank of Australia Governor Philip Lowe said an interest rate hike is plausible later this year as waiting too long could lift risks to inflation.
“In this uncertain environment – and with the starting points for wages growth and underlying inflation in Australia – we can take the time to assess the incoming information and review how the uncertainties are resolved,” Lowe said at the Australian Financial Review Business Summit, on Wednesday.
Given the outlook, though, it is plausible that the cash rate will be increased later this year, said Lowe.
The governor noted that there is a risk to waiting too long, especially in a world with overlapping supply shocks and a high headline inflation rate. But there is also a risk of moving too early, as raises risks to achieving full employment.
Lowe observed that the war in Ukraine and the sanctions against Russia have created a new supply shock that is pushing prices up, especially for commodities. This new supply shock will extend the period of inflation being above central banks’ targets.
Further, he noted that there is a risk if higher inflation rates are sustained as a result of a sequence of negative supply shocks that wages growth picks up more quickly than forecast as workers seek compensation for the higher inflation.
“I want to finish with the point that it is only possible to achieve a sustained period of low unemployment if inflation remains low and stable,” said Lowe.
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