RBA’s Lowe Says Policy Has Now Entered ‘Calibration Phase’

Australia’s outgoing central bank chief Philip Lowe said monetary policy has now entered a “recalibration phase” under which the board will likely only need to make small adjustments in response to data.

(Bloomberg) — Australia’s outgoing central bank chief Philip Lowe said monetary policy has now entered a “recalibration phase” under which the board will likely only need to make small adjustments in response to data.

Speaking in his final semi-annual testimony as Reserve Bank governor at Parliament House in Canberra on Friday, Lowe said policymakers are keeping their options open on further tightening as they assess which way services prices and household consumption break.

“It’s really only been roughly this year where policy has moved into restrictive territory and we’re still seeing the effects of that,” Lowe told lawmakers. “I see we’re really now in the third phase and it’s the calibration phase.”

Underscoring the RBA’s higher hurdle to raising interest rates further after 4 percentage points of hikes in 16 months, Lowe said “we’re kind of in a world where we’re just making, I hope, small adjustments to calibrate policy.”

The governor’s suggestion that policy may need to be tightened further spurred traders to raise their bets on a final rate rise. OIS contracts for February advanced to 4.241%, indicating about 70% odds that the RBA will hike the cash rate to 4.35% by then, from 4.1% now.


The RBA has moved slower on policy than many developed world peers as Lowe tries to hold onto recent job gains while inflation is brought down. The central bank paused at its past two meetings even though CPI at 6% remains elevated. Inflation is only forecast to fall back within the RBA’s 2-3% target in late 2025. 

Australia’s 4 percentage points of rate hikes is well below the Federal Reserve’s 5.25 points.

“With inflation having been significantly above target for some time now, the board wants to have reasonable confidence that inflation will return to target over the current forecast period,” Lowe said in his opening remarks. “We will do what is necessary to achieve that outcome.”

Lowe’s appearance comes just over a month before his deputy Michele Bullock takes the helm at the RBA. Friday’s proceedings were almost entirely led by Lowe and Bullock didn’t comment on policy matters.

The governor, like his global counterparts, has been surprised by the resilience of his economy’s labor market. Unemployment stands at 3.5%, a level last seen in Australia in the 1970s.

“We want people to understand that we’re acting consistent with our framework and that we’re prepared to pursue a path that doesn’t cause the unemployment rate to rise going forward,” he told the parliamentary panel. “And at the moment, we feel like we’re still on that path.”

Speaking about the global backdrop, the governor cautioned that international markets might be underestimating the risks of sticky services price inflation. He also said there’s significant concern about the health of the economy in China, Australia’s biggest trading partner.

When asked whether he had any regrets over his seven-year term, Lowe said the RBA had over-stimulated the economy during the pandemic “and that’s contributed to inflation problems now.”

“We didn’t fully understand the nature of the pandemic and how long it would last and what the implications would be on the economy,” he said. “So I wish, in retrospect, that we’d been able to understand that in more detail.”

At one point, Lowe was asked whether he’ll be more like former Prime Minister Tony Abbott, who has been publicly fiery and combative following his departure, or former Prime Minister Julia Gillard, who has kept a low profile.

“I don’t think I’ll be like either,” Lowe replied. His main post-RBA objective? To get his golf handicap down to “single digits.”

–With assistance from Garfield Reynolds.

(Adds comments from Lowe.)

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