(Bloomberg) — Australia’s outgoing central bank Governor Philip Lowe said the days of consistently low and steady inflation may be in the past in a wide-ranging speech titled “Some Closing Remarks.”
Supply disruptions, global warming, an aging population and the world’s transition to green energy suggest inflation is likely to be more volatile in years ahead, Lowe, who steps down Sept. 17, said in his final speech as Reserve Bank chief.
“While this doesn’t mean that the inflation target can’t be achieved on average, it does mean that inflation is likely to be more variable,” he said.
Australia’s underlying inflation averaged 2.7% over Lowe’s seven-year term that began in September 2016 — within the RBA’s 2-3% target band. However, it swung from as low as minus-0.3% during the depth of the Covid-19 pandemic in 2020 to as high as 7.8% in its aftermath two years later.
Lowe’s closing remarks in Sydney underscore the biggest question confronting economics circles at the moment. Central banks from the US to Europe and the UK are mulling whether current high interest rates are here to stay and what the implications might be for their economies.
With inflation racing higher in the post-pandemic recovery, the RBA embarked on its most aggressive tightening cycle in more than 30 years in May 2022, raising rates by 4 percentage points to 4.1%.
In a nod to criticism of his recent policies, Lowe noted that “raising interest rates and tightening policy can make you very unpopular, as I know all too well.”
While inflation has begun cooling, it remains elevated and isn’t forecast to return to target until 2025. Economists see a shallow easing cycle from next year.
Lowe expressed optimism that Australia can sustain low unemployment rates of less than 4%. Data out this week bolstered that confidence with the A$2.5 trillion ($1.6 trillion) economy maintaining its momentum in the three months through June.
Lowe’s departure comes after an independent review of the RBA recommended major changes at the institution and followed criticism of the governor’s forward guidance during Covid and confusion over his communications.
Reflecting on the bank’s pandemic response, Lowe said the RBA got some things right and some things wrong.
“With the benefit of hindsight, my view is that we did do too much,” he said. “But hindsight is a wonderful thing.”
The RBA will acquire a significantly different look after Lowe leaves. Rate meetings will be cut to eight, from 11 now, and followed by a press conference. Members of the rate-setting board will also be encouraged to give public speeches and speak to the media — a major departure from the current strategy.
Lowe said that monetary and fiscal policies need to be “well aligned” for better economic outcomes as he expressed disappointment the RBA review didn’t explore in more depth the coordination between the two.
“During my term, there have been times where monetary and fiscal policy worked very closely together and, at other times, it would be an exaggeration to say this was the case,” he said, adding the coordination was at its strongest during the pandemic.
He also mused on the importance of lifting productivity, structural issues making Australian homes among the world’s costliest, and a recent health scare in Canada that highlighted life’s uncertainties.
As he concluded his speech, Lowe wished incoming Governor Michele Bullock well for the future, saying he’d “regift” to her a ‘glass half-full’ coffee mug that he inherited from his predecessor Glenn Stevens.
“I do so in the hope that as you navigate the uncertainties ahead, you will remember that that glass is indeed half full and that we have a lot to be fortunate about here in Australia.”
(Updates with additional comments from Lowe throughout.)
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