Inflation targets have overtaken fears over high household debt as the Reserve Bank’s chief priority, clearing the way for more rate cuts.
The Reserve Bank of Australia has kept a close eye on inflation, which in recent years has been tracking below the central bank’s target range of between 2 and 3 per cent.
High household debt was the key issue holding the RBA board back from cutting rates over the last few years. But according to RBA governor Philip Lowe, household indebtedness has improved while inflation remains low. As a result, the cash rate was reduced by 25 basis points in June and by the same amount in July this year.
“These two recent reductions in the cash rate will support demand in the Australian economy,” Mr Lowe said in speech on Thursday. “So too will recent tax cuts, higher commodity prices, some stabilisation in the housing market, ongoing investment in infrastructure and a lift in resource sector investment.
“We also need to remember that the underlying foundations of the Australian economy remain strong.”
Addressing the Anika Foundation Luncheon in Sydney on Thursday, Mr Lowe said it remains to be seen if future growth in demand will be sufficient to put pressure on the economy's supply capacity and lift inflation in a reasonable time frame.
“It is certainly possible that this is the outcome. But if demand growth is not sufficient, the board is prepared to provide additional support by easing monetary policy further,” he noted.
“Whether or not further monetary easing is needed, it is reasonable to expect an extended period of low interest rates.”
The RBA governor said that, on current projections, it will be some time before inflation is comfortably back within the target range.
“The board is strongly committed to making sure we get there and continuing to deliver an average rate of inflation of between 2 per cent and 3 per cent. It is highly unlikely that we will be contemplating higher interest rates until we are confident that inflation will return to around the midpoint of the target range,” Mr Lowe said.
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