Reserve Bank governor Philip Lowe admits he doesn’t have a “crystal ball” on the outlook for inflation, but he has assured federal politicians the central bank won’t be raising interest rates until inflation it is consistently within the target band.
Inflation has consistently fallen short of the two to three per cent target band, and is one factor why the cash rate is at a record low of 0.75 per cent.
The consumer price index was 1.8 per cent at the end of 2019.
“We will not be raising interest rates until we are very confident that inflation is sustainably in the two to three per cent range,” Dr Lowe told the House of Representatives economic committee in Canberra on Friday.
Asked by committee chair and Liberal MP Tim Wilson whether he has a timeframe for this, the governor said: “I wish I could give you the answer … I don’t have a crystal ball.”
“I would like that to be sooner rather than later.”
On the flipside, Dr Lowe told the committee negative interest rates are “extraordinarily unlikely”, while the need for other options, such as quantatitive easing (QE), has not been reached.
“I do not expect it to be reached. So, it is not on our agenda at the moment,” he said in his opening statement to the committee.”
He reiterated that QE – where the central bank buys government bonds and other securities to pump money into the economy – would only be considered should the cash rate reached 0.25 per cent.
The central bank remains upbeat about the economic outlook, predicting growth of 2.75 per cent at the end of this year and three per cent by end of 2021.
He expects the negative impact of the devastating bushfires and the outbreak of the coronavirus will be short-lived.
However, said while the unemployment rate at 5.1 per cent is reasonable, it is desirable to have it much lower.
“If you told me two or three years ago we would have employment growth averaging close to 2.5 per cent, I would have thought the unemployment rate would be close to four now,” he said.
“The big surprise has been rising labour force participation. There’s been no shortage of jobs growth in Australia. In fact, it has been very strong. But it is being met with a lot of extra labour supply.”
He said that not the case in the US, for example.