Reserve Bank of Australia Deputy Governor Andrew Hauser said on Wednesday that inflation remains too high and reaffirmed the bank's resolve to bring price growth back under control. Speaking at a business lunch, Hauser pointed to strong credit growth as evidence that current interest-rate settings are not restrictive enough to cool demand.
Hauser said many parts of the economy continue to perform well, but overall growth is encountering capacity constraints. He emphasized the costs of allowing inflation to persist at its present pace, saying: "Inflation at this level is too high, and we all remember the cost excessively high inflation poses."
Reiterating messaging from the central bank's recent policy meeting, Hauser added: "We will continue to do whatever is necessary to ensure that inflation does return to the target band." That comment echoed the RBA's stance following its decision last week to raise the cash rate by 0.25 percentage points to 3.85 percent.
The rate move last week reversed one of three cuts implemented the previous year. The RBA also indicated the possibility of further tightening if inflation does not fall in line with its projections.
Recent inflation data showed core inflation accelerated to 3.4 percent in the fourth quarter, the fastest pace in over a year and above the RBA's forecasts. In response to the stronger reading, the central bank revised up its projected peak for core inflation to 3.7 percent for this year, a level notably above the RBA's long-term target range of 2 percent to 3 percent.
Financial markets reacted to Hauser's remarks with the Australian dollar strengthening. Market pricing moved to reflect expectations of at least one more rate hike from the RBA this year.
Context and implications
- Hauser highlighted strong credit growth as an indicator that borrowing conditions remain loose despite recent rate increases.
- The tightening announced last week - a 25 basis-point increase to 3.85 percent - reversed one previous rate cut and leaves open the prospect of further hikes if inflation remains elevated.
- Core inflation's acceleration to 3.4 percent and the revised projected peak of 3.7 percent place inflation clearly above the central bank's long-term 2-3 percent target band.