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RBA Admits its Policy has Contributed to Soaring Inflation

by | Wed, Jul 20 2022

Australia’s central bank admits its monetary policy has contributed to soaring inflation.

The Reserve Bank slashed the official interest rate to a record low of 0.1% percent in 2020, to prop up the economy during the pandemic.

It has since been forced to implement back-to-back rate hikes to contain cost of living.

The RBA has received ongoing criticism for its incorrect guidance during the pandemic – particularly about rates being unlikely to rise until 2024.

Governor Philip Lowe has told the Australian’s Strategic Business Forum, it is a complex environment.

“With the benefit of hindsight, it could be argued that we took out too much insurance,” said Mr Lowe.

“But, in the highly uncertain environment of the time, the right policy choice was to err on a side of too much insurance.”

“I recognise though, that it has contributed to the inflationary pressures we’re now experiencing.”

In the past three months, mortgage holders have faced three hikes – with warnings there are more to come.

The current inflation rate sits at 5.1% – which is higher than any other time since the 1990s.

Governor Philip Lowe concedes, a big challenge lies ahead.

“We do need to chart a credible path back to two to three percent,” said Mr Lowe.

“We’re seeking to do this in a way in which the economy continues to grow, and unemployment stays low.”

“It’s certainly possible to do this, but the path ahead is a narrow one, and it’s clouded in uncertainty.”

Prime Minister Anthony Albanese admits, this year will be “tough” for many Australians, with inflation still expected to peak in coming months, before decreasing next year.

Mr Albanese says, he is trying to do all he can to ease pressure.

“We’re going to be upfront with people about what we’re facing,” said the Prime Minister.

“I want to see real wages and living standards increase over our first term of government.”

“It’s why we’ve convened a Jobs and Skills Summit.”

Meantime, a wide ranging review into the RBA is being welcomed by Philip Lowe.

Three leading economists have been tasked with ensuring that central bank processes continue to support strong economic outcomes.

The review will look into the RBA board structure, the culture, monetary tools, the long-standing inflation target, and their accountability measures.

 

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