RBA boss admits 2022 rate hike “plausible” amid Russia-Ukraine inflation concerns

Reserve Bank governor Philip Lowe has warned that the unfolding crisis in Ukraine could create inflation shocks that central banks around the world might struggle to keep in check.

Speaking at an AFR Business Summit on Wednesday, Lowe acknowledged that “it is plausible that the cash rate will be increased later this year,” but remains unconvinced that it’s necessary to move as quickly as many private sector economists believe.

“The recent lift in inflation has brought us closer to the point where inflation is sustainably in the target range. So too have recent global developments. But we are not yet at that point,” he said.

The RBA boss acknowledged there are risks in being too patient, especially considering the mounting supply shocks and runaway inflation, but argued there are also downsides to moving too quickly.

“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,” he said.

“There are benefits to the economic welfare of Australia of a period of relatively steady growth in which people get jobs, have training and develop skills.”

Ukraine-Russia war delivers new “supply shock”

While many of the supply-side issues that had wreaked havoc on the global economy had begun to ease in recent months, the breakout of conflict in Eastern Europe has generated a fresh batch of problems for central banks.

“The war in Ukraine and the sanctions against Russia have created a new supply shock that is pushing prices up, especially for commodities,” Lowe said.

“This new supply shock will extend the period of inflation being above central banks' targets.”

This runs the risk that the low-inflation psychology that has characterised many advanced economies over the past two decades starts to shift. If so, the higher inflation would be more persistent and broad-based, and require a larger monetary policy response.

While European markets are already feeling the effects of this supply shock, the RBA does not believe the impact on Australia will be as severe.

That’s because Australia exports many of the key commodities whose prices are currently going up.

“This means that our terms of trade will rise over the months ahead, which will provide a boost to our national income. This boost is likely to be evident mainly in the form of higher profits for companies in the resources sector and higher tax revenue,” Lowe said.

But Lowe admitted that higher petrol prices were inescapable, and are expected to eat into household budgets and raise costs for Australian businesses.

“Given this, I expect that most of this extra national income will be saved, rather than flow through into higher spending,” Lowe said.