Reserve Bank governor Philip Lowe says inflation would have to be within the central bank’s target band for several quarters before it raised interest rates.
Dr Lowe and his economics team have told federal politicians inflation could spike to three per cent and the top end of the central’s bank’s target band in six months time before retreating again.
“I am expecting we’ll want to see inflation between two and three (per cent) for a few quarters and then there’d be strong prospects that it is going to stay there,” he told parliament’s economics committee.
“We will not be raising interest rates when inflation gets up to 2.2 per cent.”
The central bank does not expect to lift the cash rate, currently at a record low 0.1 per cent, until 2024 at least under these conditions.
In his opening statement to the committee, Dr Lowe said Australia’s success in dealing with the health side of the coronavirus pandemic and China’s quick rebound have been pivotal to the nation’s economic recovery.
He said economic growth and employment outcomes have been at least as good as the upside scenario the central bank published last year.
These reflect Australia’s success on the health front, the very significant fiscal and monetary support that has been provided and the resilience of Australians during the pandemic.
“The result is that Australia has done better than most other countries on both the health and economic fronts,” Dr Lowe said.
“There are few places in the world you would rather be.”
At the same time there has been a strong rebound in global trade.
“This, together with the continuing strong recovery of the Chinese economy, has boosted many commodity prices and Australia’s terms of trade,” Dr Lowe said in his opening statement.
But he said the more important piece of positive news in terms of global economy is the development of vaccines.
“These vaccines hold out the prospect of restrictions being eased and many activities returning close to their pre-pandemic normal,” he said.
“The result is a more positive outlook for the global economy and a lessening of some of the downside risks.”
But he said it is prudent to be prepared for further setbacks.
Meanwhile, in a further sign of the economy recovery, new figures show the services sector growing at its fastest pace in over a year.
The Australian Industry Group performance of services index rose 1.4 points to 54.3 over the past two months.
“With a considerable way to go before a full recovery can be claimed, the more convincing lift in new orders is an encouraging pointer to continuing recovery over coming months,” Ai Group chief executive Innes Willox said.