Interest Rates Need to Rise to Fight the ‘Evil of Inflation’: Reserve Bank of Australia

Governor of the Reserve Bank of Australia Philip Lowe makes a speech in Sydney, Australia, on March 19, 2020. (Brendon Thorne/Getty Images)

The Reserve Bank of Australia (RBA) has warned that interest rates need to go higher amid the current cost of living crisis to rein in inflation and avoid the risk of recession.

In a speech to the Reserve Bank Board dinner in Hobart, Philip Lowe, the governor of the RBA, said the bank “will do what is necessary” to return inflation back to sustainable levels.

“[High inflation] is a scourge. High inflation devalues your savings. It worsens inequality in our society, and it undermines our living standards. It hurts us all by impairing the functioning of our economy,” he said.

“It is for these reasons that the Reserve Bank Board will make sure that this episode of high inflation is only temporary.”

The consequences of not raising interest rates would mean “the evil of inflation would be with us for longer, and the eventual increase in interest rates needed to bring it down would be greater,” he added.

Lowe was aware that the continued interest rate hikes were unwelcome to many people, such as families under budget pressures from rising petrol and grocery bills.

But as interest rates had returned to normal levels, the bank slowed the pace of hikes from half to quarter percentage point increases.

However, Lowe said if the data indicated the need for further aggressive interest rate increases, the bank would do so.

“We are not on a pre-set path,” he said.

Consecutive Interest Rate Hikes Amid Soaring Inflation

The comments come after the RBA announced its seventh consecutive cash rate increase of 0.25 percent to 2.85 percent amid the fastest monetary tightening cycle in almost three decades.

Inflation in the September quarter was revealed to have reached a 32-year high of 7.3 percent.

Along with the cash rate announcement, the RBA revised its forecast for peak inflation for this year, up from 7.75 percent to 8 percent.

Treasurer Jim Chalmers also named inflation as the country’s biggest challenge but said domestic inflation reflected the impacts of the Russia-Ukraine War.

“Putin’s war is upending energy markets and sending prices skyrocketing,” Chalmers told the Economic and Social Outlook Conference in Melbourne.

“Currently, energy prices are adding 0.8 percentage points to Australia’s headline inflation.”

According to budget estimates, Australians can expect their electricity bill to rise by another 56 percent over the next two years.

He noted that while supply-side, energy-driven inflation was dominating headlines, demand had contributed to price rises too—which is what the RBA has been responding to.