Election 2022: Inflation jump ‘a surprise to us all’, says RBA’s Philip Lowe

Reserve Bank governor Philip Lowe said Tuesday’s first rate hike in a decade was triggered by a surge in inflation which ‘comes as a surprise to us all’.

Reserve Bank of Australia governor Philip Lowe. Picture: NCA NewsWire / Jeremy Piper

Reserve Bank governor Philip Lowe said Tuesday’s first rate hike in a decade was triggered by a surge in inflation which “comes as a surprise to us all”, and that Australian households had always “understood that rates would go up at some point”.

Dr Lowe’s comments came as he defended telling the country as recently as November that it was “still plausible that the first increase in the cash rate will not be before 2024” – a forecast the central bank adopted during the height of the pandemic when Dr Lowe joined the government in a “Team Australia” moment to support the economy through the health crisis.

Dr Lowe also made it clear on Tuesday that the increase to 0.35 per cent was the first in a string of rises through this year and potentially into the next. “I acknowledge that this increase in interest rates comes earlier than the guidance the bank was providing during the dark days of the pandemic,” he said.

“During that period, especially in 2020, the national health situation was precarious and the economic outlook was dire and clouded by great uncertainty. The board wanted to do everything it could to help the country get through that difficult period. In those unprecedented times, we judged that the economic damage from the pandemic was likely to require that interest rates remain at very low levels for years.” Ahead of Friday’s Statement on Monetary Policy, Dr Lowe ­revealed that the central bank now expected inflation would reach 6 per cent in 2022 – almost double the 3.25 per cent rate predicted three months ago.

The RBA’s preferred measure of underlying inflation would hit 4.75 per cent by December, he said, well above the upper end of the bank’s 2-3 per cent target, and against the 2.75 per cent predicted in February. “This has come as a surprise to us all, not just here in Australia. The inflation surprise has really been a big one, and we have had to respond to it,” he said.

CBA head of Australian economics Gareth Aird said he was “disappointed in some aspects of the RBA’s communication” – not least Dr Lowe’s statement following the April board meeting that he would wait to see wage price index data on May 18 before moving on rates, comfortably after the federal election.

“The strength of the inflation data has surprised a lot of people, but a lot of people expected the inflation rate to pick up by more than the central bank did,” he said. “At the end of the day their decision, compared with their forward guidance, has not married up. No one has a crystal ball, but they didn’t need to go out there and … say they wouldn’t need to raise the cash rate until 2024 at the earliest,” he said.”

After late last year virtually ridiculing the market’s forecasts for a series of rate rises in 2022, Dr Lowe was less forthcoming on aggressive investor bets the cash rate target would hit 2.75 per cent by December. “I don’t want to offer any comment on the plausibility of market pricing,” he said.