Reserve Bank Governor Philip Lowe emphasized the need to reduce business regulation and open up the economy as a way to address the rising inflation during a Senate Estimates hearing on Feb. 15. He stated that if there is greater competition and more investment, the price pressures for any given level of aggregate demand will be less. He also suggested that an increase in “cheap, reliable energy” supply would help reduce prices. Lowe did not rule out further increasing interest rates, but said it would depend on inflation data, the strength of the global economy, and what is happening with prices and wages.
Lowe defended the bank’s decision to raise the official cash rate nine consecutive times, saying that inflation is too high and needs to come down. He acknowledged that there is a risk of high-interest rates dampening economic activity, but also a risk of the RBA not doing enough, which could lead to continued high inflation. He pointed out that if inflation stays high, it is damaging to the economy, worsens income inequality, and erodes the value of people’s savings.
Lowe said that the current inflationary situation is partly due to the RBA’s overreaction during the COVID-19 pandemic, where it pumped large amounts of money into the system and kept interest rates at historic lows. He reasoned that the bank was advised that the pandemic would last for a long time with a much more detrimental impact to the economy.