Why Hiking Rates Now, and Quickly, Isn't the Answer

Reserve Bank of Australia Governor Philip Lowe is a history buff. He reckons he has a chance to drive the jobless rate to the low levels of the 1970s without the inflation spiral that gave the decade a bad name.

Lowe’s ambition rests on the premise that he can succeed where other central bankers have failed, by allowing the recovery to strengthen without getting unbearably hot. Data on Monday showed just how complicated this task will be, with retail sales blowing past forecasts to notch a record 8.2% gain in the final three months of last year. While inflation has jumped unexpectedly in the past two quarters, it hasn’t yet pierced the upper end of the central bank’s 2% to 3% target. Lowe says he wants to see levels “sustainably” within the range before lifting borrowing costs, though he hasn’t defined what that means.

The RBA kept its official rate at 0.1% on Feb. 1 and, a few days later, lifted its forecasts for jobs and inflation. The bank counseled patience on rates while, in a nod to the accelerating economy, announced it would wrap up the bond-buying program it introduced at the peak of the pandemic. The signaling here is delicate. Concluding quantitative easing doesn’t mean an interest-rate hike is imminent, Lowe stressed. Success in containing inflation — the pace of price increases is well above target in the U.S. and U.K. — will mean the RBA is vindicated in holding off on rate hikes, at least for a while. Failure will mean borrowing costs probably climb faster and further than might otherwise be the case. Many economists foresee rates rising in the second half of the year.