(Bloomberg) -- Australia's central bank chief Philip Lowe signaled a steady series of interest rate increases as he highlighted the difficult road to a soft landing for the economy.
“We do need to chart a credible path back to 2–3%” inflation in which the economy grows and unemployment stays low, the governor said in a speech in Melbourne Wednesday. “It is certainly possible to do this, but the path ahead is a narrow one and it is clouded in uncertainty.”
In a rare discussion of the neutral rate, Lowe said that the Reserve Bank estimates its level is at least 2.5%. Responding later to an audience question, the governor said the RBA is “steadily increasing” its cash rate and at some point will probably get to at least that 2.5% neutral level, with the pace of hikes to be determined by the inflation outlook.
The RBA, like counterparts across the world, is hiking to try to prevent inflation expectations from becoming unanchored. It's doing so against the backdrop of rapidly rising consumer prices and the tightest labor market in half a century, with wage increases likely to further fuel inflation.
Lowe reflected on the pandemic-era stimulus delivered by the central bank, acknowledging in the speech that the RBA might have taken out “too much insurance.” He said the policy support had contributed to inflationary pressures in the economy now.
“Understandably, judgments will differ as to whether we over-insured or not,” he said. “But in the highly uncertain environment of the time, the right policy choice was to err on the side of too much insurance, rather than too little.”
Australia's A$2.1 trillion ($1.4 trillion) economy is running hot with unemployment the lowest since 1974, solid consumer spending and robust business confidence. That explains why RBA policy makers expect households and the broader economy will be able to withstand further rate increases.
Lowe has raised rates three times since May, initially by 25 basis points and then back-to-back half-point moves in June and July.
Some economists, including at Goldman Sachs Group Inc., predict a 75 basis-point move next month, expecting that second-quarter inflation due out next week will show a higher rate and ratchet up pressure on the RBA for a larger move. The bank is also due to provide its quarterly update of economic forecasts three days after the Aug. 2 policy meeting.
Money markets are pricing in a 3.5% cash rate by December from the current 1.35%, fanning fears of an economic slowdown or even a recession.
Rising borrowing costs are already weighing on the property market, sending prices in Australia's two biggest cities -- Sydney and Melbourne -- lower and denting consumer sentiment.
Yet households still have plenty of cash from pandemic-era stimulus that is helping underpin consumption and suggests they can weather higher mortgage repayments.
(Updates with comments from Q&A.)
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