‘Plausible’ rate hike in 2022 as war in Ukraine adds risk to economy

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The head of Australia’s central bank has said an interest rate hike in 2022 is now “plausible” as the complexities of war in the Ukraine threaten to increase inflation.

Speaking at the AFR Business Summit, Reserve Bank Governor Philip Lowe said the bank was toeing the line between lifting rates too early and jeopardizing unemployment figures, or waiting too long and suffering a “supply shock”.

“In this uncertain environment, and with the starting points for wages growth and underlying inflation in Australia, we can take the time to assess the incoming information and review how the uncertainties are resolved,” Mr Lowe said on Wednesday.

“Given the outlook though, it is plausible that the cash rate will be increased later this year.”

Philip Lowe, governor of the Reserve Bank of Australia (RBA), speaks during the AFR Business Summit where he warned an interest rate rise in Australia later this year was “plausible”. (Bloomberg)

Currently Australia’s interest rates are sitting at the historically low level of 0.1 per cent.

Mr Lowe and the RBA have long maintained that they would wait for data that showed sustainable inflation between two and three per cent before lifting interest rates.

However the war in Ukraine and the potential for soaring fuel prices have added another dimension to the RBA’s position that could “require a larger monetary policy response”.

“I recognize that there is a risk to waiting too long, especially in a world with overlapping supply shocks and a high headline inflation rate,” Mr Lowe said.

“But there is also a risk of moving too early. Australia has the opportunity to secure a lower rate of unemployment than has been the case for some decades.

“Moving too early could put this at risk.”

The RBA may be required to respond with “a larger monetary policy response” if the war in Ukraine heightens inflation measurably in Australia. (Louie Douvis)

The RBA Governor considered the implications of Australians dealing with an increased cost of living, such as changing jobs to secure a higher rate of pay.

“There is also the question of how wages respond to the current higher rates of headline inflation,” Mr Lowe said.

“There is a risk if these higher inflation rates are sustained as a result of a sequence of negative supply shocks, that wages growth picks up more quickly than forecast as workers seek compensation for the higher inflation.”

Petrol prices reach record highs in Sydney.
Soaring petrol prices have been one of the first indicators of the economic impact of the war in Ukraine. (9News)

The Governor reminded locals that by global standards, the Australian economy had rebounded strongly from the impacts of COVID-19 but the risks of the war in the Ukraine were yet to be fully realised.

“Against this generally positive outlook, the main sources of uncertainty are COVID-19, which is not yet behind us and the tragic war in Ukraine,” Mr Lowe said.

“This war is first and foremost a catastrophic event in human terms, but it is also a new major risk to the global economy.

Pregnant woman carried on stretchers as Russia attacks hospital

“It is difficult to know what the full implications are, but from today’s viewpoint, the main economic effects stem largely from higher commodity prices.”

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