Rate hike to build 'confidence' inflation will come down: RBA

In his first public appearance since the RBA board's decision to raise the official cash rate to 4.1 per cent, Dr Lowe admitted the effects of interest rates were felt "unevenly".

"Rising interest rises [are] causing significant financial pressure for some households. But this unevenness is not a reason to avoid using the tool that we have," the governor said.

Dr Lowe said the central bank was trying to navigate the economy on a "narrow path" of bringing inflation down while minimising the increase in unemployment, and warned that travelling along it would be "bumpy".

But the Reserve Bank governor made it clear the central bank's overriding priority was to lower inflation.

"The desire to preserve the gains in the labour market does not mean that the Board will tolerate higher inflation persisting," he said, highlighting the risk that the longer price pressures remain elevated, the greater the likelihood that become embedded in wage claims and pricing decisions.

"[Tuesday's] decision to increase interest rates again was taken to provide greater confidence that inflation will return to target within a reasonable timeframe."

The central bank has flagged that interest rates could go higher, but Dr Lowe struck a slightly less hawkish tone, saying that "some further tightening of monetary policy may be required, but that will depend upon how the economy and inflation evolve".

In his speech, Dr Lowe made it clear the June 6 rate hike was not triggered by the release of figures showing the monthly consumer price index grew by 6.8 per cent in April.

While the result was higher than expected, "it has not changed our assessment that inflation is trending lower", he said.

But the governor said other developments, including surging rents, high services inflation, larger electricity price hikes and rising unit labour costs meant that it was "too early to declare victory in the battle against inflation".

Dr Lowe warned there were "greater upside risks" to the inflation outlook, including persistent services price inflation, higher wages and a rebound in house prices.

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On wages, the RBA boss turned the spotlight on unit labour costs.

Over the entire inflation targeting period of the central bank, the governor said, increases in the CPI have closely matched growth in unit labour costs.

"In recent times, unit labour costs have been increasing quite strongly," Dr Lowe said.

"Over 2022, they increased by around 7.5 per cent, which is one of the largest annual increases during the inflation targeting period.

"Ongoing strong growth in unit labour costs would underpin ongoing high inflation outcomes."

The RBA governor linked this outcome to the nation's low productivity, noting that per hour output has not changed since late 2019.

"This means there has been no net growth in productivity since then," he said.

Dr Lowe said wage growth was currently consistent with inflation dropping back to the central bank's 2 to 3 per cent target band, but added that this was conditional on productivity lifting.

The nation's recent lacklustre productivity performance has emerged as a key inflation and interest rate risk, and the governor flagged that it will be closely monitored by the central bank.

"Given the importance of this issue and the increased risks on this front, the [RBA] board will continue to pay close attention to trends in productivity growth and their implications for the sustainable rate of growth in nominal wages," he said.

Betashares chief economist David Bassanese said that while the Reserve Bank was trying avoid driving the economy into recession, it was clear it would not hesitate to do so if that was what was needed to bring inflation down.

Mr Bassanese thinks two more rate hikes are likely before August.

While he is not forecasting a recession, the economist warned that the higher rates go, the greater of a risk it becomes.