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Australia’s central bank flags more hikes as rates still ‘very low’ -Breaking


© Reuters. FILE PHOTO – Two women stand next to the Reserve Bank of Australia Headquarters in central Sydney on February 6, 2018, Australia. REUTERS/Daniel Munoz/File Photo

SYDNEY, (Reuters) – Australia’s top central banker Tuesday warned of more tightening as rates remain “very low”. It was crucial that inflation does not fuel public expectations or wage claims.

Philip Lowe (RBA Governor) said that inflation had risen from 6% to 7% in the past year due to price pressures.

It would mark the highest rate in many decades. This pace is also far higher than the RBA’s target range of 2-3%.

Lowe spoke out saying that as we work our way to inflation of 2 to 3.3%, Australians need to be ready for higher interest rates. “The interest rate is very low when compared to an economy that has low unemployment but is also experiencing high inflation.

After a quarter-point increase in May, the official cash rate now stands at 0.85%.

In July markets are expected to see a further half-point rise, and then there will be a string of rate increases until rates reach 3.75% at the close of the year.

It would result in one of most aggressive tightening periods on record, and rates would rise well beyond the 2.5% rate Lowe suggested was neutral for economic growth.

Lowe said Tuesday that he wanted to stress the fact that there is no predetermined path. The Board’s evaluation of inflation and the labor market will guide how fast and far we can raise interest rates.

The RBA will be particularly interested in how households respond to increasing borrowing costs, given that real wages are falling and house prices have fallen from highs.

Lowe stated that it was vital that inflation expectations are anchored at 2 to 3% and that prices that rise now do not translate into higher expectations for rising inflation.

Lowe stated that “higher interest rates can play a part here by helping to ensure that spending grows broadly according to the economy’s ability to produce goods or services.”