The head of the Reserve Bank has defended the central bank’s aggressive interest rate hiking cycle in response to the highest inflation rate since 1990.

In an opening statement to a parliamentary committee, Philip Lowe said the inflation rate was still “way too high” at 7.8 per cent in the December quarter.

“This is the highest rate in a number of decades and it is higher than we were expecting just a few months ago,” he said.

Dr Lowe reiterated the need for more interest rate increases in the months ahead based on the information available to date.

“How much further interest rates need to increase will depend on developments in the global economy, how household spending evolves and the outlook for inflation and the labour market.”

He said a soft landing was still possible for Australia but it was also a possibility “that we are knocked off that narrow path”.

“Some are more concerned about the prospect of a sharp rise in unemployment in the near term, while others are more concerned about the prospect of inflation staying too high, which would in time entail even higher interest rates and a sharper rise in unemployment.”

Dr Lowe also commented on the labour market following the official unemployment rate lifting from 3.5 per cent to 3.7 per cent in January – a higher-than-expected reading.

“The labour market remains tight, with the unemployment rate near a 50-year low,” he said.

However, he acknowledged there were signs of weakening in the labour market.

“Job vacancies remain at a very high level, although some firms report that it has been less difficult to find workers recently than it was a few months back.”

The RBA expects the unemployment rate to gradually drift up due to slower growth and to reach 4.5 per cent by mid-2025.

The appearance before the House of Representatives economics committee, chaired by Labor MP Daniel Mulino, is Dr Lowe’s second round of questioning from parliamentarians this week.

This followed another 25 basis point interest rate hike last week that took the official cash rate to 3.35 per cent.

Dr Mulino said the Reserve Bank had hiked interest rates by one per cent since the last hearing in September.

“This sharp increase in rates, unprecedented in recent times, has been creating pressure across households and the economy,” he said.

“While the RBA’s view is that inflation is likely to have peaked around the end of 2022, there is still considerable uncertainty in the economic outlook with further interest rate increases expected in the months ahead.”

– AAP

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