The central bank may not wait for inflation to return to its target band before cutting interest rates, the RBA governor has said.
Speaking during the House of Representatives standing committee on 9th February Reserve Bank of Australia (RBA) governor Michele Bullock stated the RBA could begin cutting interest rates before inflation hits the target band of 2–3 per cent if the economy was in good shape.
In her opening statement, Ms Bullock reiterated that the central bank has forecast inflation returning to 3 per cent in 2025 and will reach the midpoint of 2.5 per cent in 2026.
"If we think monetary policy's restrictive now, which we think it is, there's a question [that comes about] when do we reduce restrictiveness back to neutral, and do we have to be in the band at 2.5 per cent before we think about doing that?" Ms Bullock said.
She added that while the board may consider rate cuts before the target band is achieved, it needs to be confident that it will reach that goal before removing the restrictive nature of monetary policy.
However, Ms Bullock stated that inflation still remains a major challenge for the Australian economy, despite the recent encouraging signs.
"An inflation rate with a '4' in front of it is not good enough and still some way from the midpoint of our target," she said.
"Given this, the board held the cash rate target at 4.35 per cent at its meeting earlier this week"
In a press conference held after the February board meeting, Ms Bullock stated the RBA has not "ruled in or out" any further rate hikes or rate cuts and that the board's forecast for the cash rate remains as an "assumption".
"Importantly, these forecasts are conditioned on the assumption that inflation expectations remain anchored around the midpoint of the target range," Ms Bullock said.
"Furthermore, these are our central forecasts and there remains a great deal of uncertainty around inflation outcomes that far out.
"Even if the economy evolves along the central path, inflation will still have been outside the target range for four years."