Speaking in Zurich, governor Philip Lowe says Australians need to rediscover their faith in the RBA’s actions or risk even higher interest rates, reports hansvan333.
| The Reserve Bank has only a “narrow path” to curb runaway inflation without triggering an economic downturn, governor Philip Lowe has warned, as the bank pushes back against a change in Australians’ “inflation psychology” that he fears could inflict more damage.
“There is a path there to have inflation come down without the economy having too much pain, but it’s a narrow path,” Mr Lowe repeatedly said during a UBS panel discussion in Zurich late on Friday . Mr Lowe said the RBA was sometimes likely to surprise the market – as happened to some market participants when yield-curve control was abandoned last year. But he hoped that “over time people will understand our reaction function” .“I hope … broadly they [markets] get the direction of movement right, even if they don’t get the number of basis points right at each meeting,” he said.
“It’s not formal wage indexation, but it’s indexation of a kind because you can understand why people faced with high inflation want compensation for it, especially when the unemployment rate is as low as it is,” Mr Lowe said. “If people start to worry that we can’t chart that credible path back then I think the shift in psychology could be quite persistent, and we know where that ends,” he said.
But there was always the possibility of an unexpected shock, or of global developments that could complicate the path back to the target.
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