The right action taken now will hopefully prevent sharper slowdown: RBA Governor Lowe

Within an address to The Australian Strategic Business Forum earlier today, Reserve Bank (RBA) governor Philip Lowe claimed that acting quickly with aggressive interest rate rises would not only tackle inflation but alleviate the need for Australia’s cash rate to peak as high as previous economic cycles.

Lowe claimed the current growth in aggregate demand places pressure on the capacity of the economy and pointed to the current battle by companies to constrain costs in the food and building sectors.

“We need some moderation in aggregate demand and higher interest rates – even though many people don’t like that as part of the way we do that,” Lowe noted this morning.

“Let’s just think of the alternative, if we don’t have higher interest rates, then we’re going to have higher inflation persist.”

Addressing higher inflation

Lowe reminded his audience that the risk of higher inflation is best addressed through much higher interest rates... and a sharp slowing in the economy.

This has only galvanised the RBA’s mindset of steady increases in interest rates now to prevent a persistent shift in inflation and inflation expectations.

"By doing that we can have a lower peak in interest rates and hopefully avoid the need for a sharp slowing in expenditure,” Lowe said.

“It's better to have a modest slowing of expenditure at a time of full employment than a sharp slowing later on when inflation's much higher."

Lowe also reminded his Melbourne audience this morning that the RBA will do what is necessary to return inflation to 2-3% over any reasonable horizon.

Monetary policy review

Lowe has also embraced the Albanese government's decision to review Australia's monetary policy arrangements and the Reserve Bank and gave the government-appointed panel the thumbs-up.

"It is an opportunity to take stock of our monetary policy arrangements and make sure that they are fit for purpose for the challenges ahead. We look forward to participating in this process and listening to and learning from others."

3.35% by November?

The RBA has already raised rates three times in three months.

The current cash rate is 1.35%, and ANZ (ASX: ANZ) is predicting four successive 50 basis point rate hikes in August, September, October and November.

A further 200 basis points of tightening would see the cash rate hit 3.35% by November.

By comparison, CommBank (ASX: CBA) expects two 50 basis point increases in August and September, followed by one further 25 basis point rise in November, which would bring the cash rate to 2.6%.