CPI spike not enough for rate rise: RBA

Colin Brinsden, AAP Economics and Business Correspondent
·3-min read

The Reserve Bank is predicting inflation to briefly spike to three per cent by mid-year, but governor Philip Lowe insists that on its own this won't be enough to raise interest rates from record lows.

In its quarterly statement on monetary policy, the Reserve Bank says movements in the consumer price index will continue to be choppy, reflecting the unwinding of rent reductions and various government support measures.

This would be the first time the consumer price index has reached the top of the central bank's two to three per cent target bank since June 2014.

"I am expecting we'll want to see inflation between two and three (per cent) for a few quarters and then there'd be strong prospects that it is going to stay there," Dr Lowe told federal MPs on Friday.

The central bank does not expect to lift the cash rate, currently at a record low 0.1 per cent, until 2024 at least under these conditions.

"We will not be raising interest rates when inflation gets up to 2.2 per cent," the governor said as an example.

If the timing is correct, this will be beyond Dr Lowe's seven-year term as governor, which ends in September 2023.

Dr Lowe said Australia's success in dealing with the health side of the coronavirus pandemic and China's quick rebound had been pivotal to the nation's economic recovery.

"There are few places in the world you would rather be," Dr Lowe said.

At the same time there has been a strong rebound in global trade.

"This, together with the continuing strong recovery of the Chinese economy, has boosted many commodity prices and Australia's terms of trade," Dr Lowe said.

But he said the more important piece of positive news in terms of global economy was the development of vaccines.

"These vaccines hold out the prospect of restrictions being eased and many activities returning close to their pre-pandemic normal," he said.

But he said it was prudent to be prepared for further setbacks.

The quarterly statement and Dr Lowe's appearances marked a deluge of Reserve Bank communication this week.

"Both were consistent with the clear and bold message earlier in the week to err on the side of more, rather than less, accommodation to support the recovery," RBC Capital Markets head of strategy Su-Lin Ong said.

Meanwhile, in a further sign of the economic rebound, new figures show retail spending grew 2.5 per cent in the December, building on the 6.5 per cent surge in the previous three months.

The National Retail Association said shoppers splurged a record $55 billion over the Christmas shopping period, which spans the second-half of November and December.

"From Black Friday and Cyber Monday in November right through to the final days before Christmas and Boxing Day, consumers across the country splashed their cash at the shops," NRA CEO Dominique Lamb said.

"The reopening of state economies coupled with Australians unable to spend the holiday period overseas led to a higher than usual level of discretionary spending."

A separate report also showed the services sector growing at its fastest pace in over a year.

The Australian Industry Group performance of services index rose 1.4 points to 54.3 over the past two months.

"With a considerable way to go before a full recovery can be claimed, the more convincing lift in new orders is an encouraging pointer to continuing recovery over coming months," Ai Group chief executive Innes Willox said.