Wayne Cole

SYDNEY, (Reuters) – Australia’s central banker said Friday that it is possible for interest rates to rise in the second half of this year. However, there are risks when moving too quickly. The bank would like to view a few more quarterly inflation reports before making a decision.

Philip Lowe, Governor of the Reserve Bank of Australia (RBA), stated that it wasn’t yet clear if the recent rise in inflation will last. The RBA Board is prepared to wait to find out.

These uncertainties will not be solved quickly, according to Lowe. Lowe said that it would be nice to have another couple of CPI reports. These are quarterly consumer price indexes (CPI).

It would be possible to raise the 0.1% cash rates from August onwards. This is because data for the March quarter CPI and June quarter CPI will be due in April 27th, respectively.

Futures markets bet that it will need to act more aggressively. They expect futures prices to rise by 0.25% in June and four to 1.25% at the end.

This is due to U.S. rate outlook, which was teetering on the edge of a shockingly high inflation reading. Markets bet that the Federal Reserve will hike next month by 50 basis points.

Lowe emphasized that the US inflationary pressures were not as severe in Australia. In Australia consumer prices are running at 3.5% while core inflation is at 2.6%.

Lowe pointed out that core inflation has only just returned to the RBA’s target range of 2-3% after seven years below it.

The rate of wage growth in the UK was 2.2%. It was less than half that of Britain or the United States. Therefore, policymakers wanted it at 3.0% and more to offset the withdrawal stimulus.

Lowe said that this gave the RBA an unusual opportunity to drive the unemployment rate below 4%, for the first-time in fifty years. After falling faster than everyone expected, the unemployment rate fell to 4.2% in December.

Lowe said, “Over time we have an opportunity to secure lower rates of unemployment than what was possible just short while ago.” This could be at stake if we move too quickly (on rates).

However, Lowe’s long-term outlook was more optimistic than the markets. He hoped that real rates would increase enough to make him a positive policy maker.

Inflation would be at 2.5% on average, so the cash rate should rise to that level.

The markets, however, suggest rates will reach a peak of around 2.0%. While yields on 10-year bonds rose this week, real-world values are negative at 2.16%.