Australia rate cut before inflation hits target: RBA board member

The central bank won’t wait until inflation is back in the target band before it starts to cut interest rates, according to board member Ian Harper.

RBA Board member Ian Harper leaves the Reserve Bank of Australia in Sydney in January. Picture: Nikki Short

The Reserve Bank of Australia will not wait until inflation is back in the desired target band before it starts to cut interest rates, said economist Ian Harper, a member of the central bank’s policy-setting board.

“With the lags in the application of policy, if you were to wait until you literally saw the whites of the eyes, then you could easily have overdone it,” Mr Harper, who does not speak on behalf of the RBA, said in an interview with The Wall Street Journal Friday.

With Australia’s inflation dropping to a two-year low of 4.1 per cent on year in the final three months of 2023, many economists are speculating that the trigger for interest rates to be lowered isn’t too far away.

Mr Harper said he was not fixating on any particular level of inflation that would signal the start of an easing cycle.

“It’s a bit like driving a car. You are looking down the road so you are not making decisions at the very last minute,” he added. “If there’s a turn coming up you start to prepare yourself for that”.

“But precisely at what point you decide to shift gear is not something that I can forecast,” Harper said.

More broadly, Mr Harper said that he thought that the economy was on a narrow path toward inflation returning to the 2 per cent to 3 per cent target band by late 2025 as forecast by the RBA.

Still, he could not rule out the need for a further interest rate increase.

He pointed to recent data in the US that showed inflation was stickier than expected by the markets, saying it was also clear that the downward trajectory of price pressures in Australia is not yet assured.

“It’s not absolutely clear that the job is done yet,” he said.

RBA Governor Michele Bullock indicated last week all policy options remain on the table, adding that the balance of policy risks for now are about even.

Asked if the RBA was waiting for other central bank to start cutting before it followed, Mr Harper said the actions of policy makers elsewhere was a consideration, but ultimately, domestic forces would guide the board.

“We don’t operate in a vacuum. We’re internationally connected and importantly the relationship between interest rates in the U.S. and Australia will have an influence on the currency,” he said.

Mr Harper said he was not overly concerned by news this week that unemployment rose by more than expected.

The jobless rate jumped to a two-year high of 4.1 per cent in January from 3.9 per cent in December while hours worked slumped, fuelling bets in the market that interest rate cuts will be delivered in the second half of this year.

“We had expected that unemployment would do that,” Mr Harper said.
The Wall Street Journal