By James Glynn
SYDNEY--Reserve Bank of Australia Gov. Philip Lowe said Tuesday that while the central bank is prepared to wait longer to get inflation down than many of its peers, there are limits to how long it can wait.
The RBA delivered an unexpected rise in the official cash rate to 3.85% from 3.60% at a policy meeting earlier Tuesday, surprising financial markets which were expecting the central bank to remain sidelined for a second month.
"The board is resolute in its commitment to returning inflation to target within a reasonable timeframe. We don't need to get inflation back to target straight away, but nor can we take too long," Mr. Lowe said in a speech in Perth.
"We are taking a bit more time than some other countries, on the basis that doing so can preserve some of the gains in the labor market. But there is a limit here," he added. "If we take too long to get inflation back to target, expectations will adjust and life will become more difficult."
Tuesday's interest rate hike was the 11th since May 2022, and was delivered despite confirmation in last week's first quarter inflation data that price pressures peaked in late 2022.
There were a number of factors that supported the decision to increase interest rates, among them is a concern that inflation is still running at an annual rate of 7.0%, and could unhinge inflation expectations.
Mr. Lowe also pointed to rising unit labor costs, three years of flat productivity growth, and a tight job market as reasons supporting a rise in interest rates.
Stubborn strength in services inflation, a weaker Australian dollar, and a jump in house prices were also factors.
"We have seen further evidence that the Australian labor market is still very tight, that services price inflation is proving to be uncomfortably persistent abroad, and that asset prices - including the exchange rate and housing prices - are responding to changes in the interest rate outlook," Mr. Lowe said.
Stubbornly high service price inflation abroad also points to an upside risk in Australia, especially given the high degree of commonality across countries in inflation dynamics recently, he said.
"Australians need to have confidence that inflation will come down and return to target. If people think inflation is going to remain high then, understandably, they will adjust their behavior," Mr. Lowe said.
Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve," he said.
"The board is not on a pre-set course," Mr. Lowe said.
Write to James Glynn at james.glynn@wsj.com
(END) Dow Jones Newswires
05-02-23 0734ET
