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How high will interest rates go

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The RBA wants to see interest rates meet inflation and remain there. 

The Reserve Bank (RBA) is targeting interest rates of 2.5 to 3 per cent, the RBA governor, Philip Lowe, told the House of Representatives Standing Committee on Economics on Friday.

“The midpoint of our inflation target at the moment is 2.5 per cent. So, if inflation averages over the next 10 years, 2.5 per cent, you would expect that the cash rate at average is at least 2.5 per cent as well,” Dr Lowe said. 

Dr Lowe explained that interest rates should “at least average the midpoint of the inflation target”. 

“I suspect it should even average higher, and that because if there's productivity growth in the economy that should lead to a higher real interest rate,” the governor said. 

“But I think we will cycle around some number between 2.5 and 3.5, it's hard to be specific, and will cycle up and down that with the economic cycle.”

Dr Lowe asserted that rates are unlikely to return to near-zero levels.  

“Well, I hope they don't return lower, because that would mean the economy's weak. We would only see rates come back down to close to zero if we had a sharp downturn again.”

Dr Lowe explained that there is a long lag between interest rate rises and seeing them play out in the economy in full. 

The maximum effect, according to Dr Lowe, takes 18-24 months to play out. 

Earlier on Friday, the governor confirmed that the RBA would lift interest rates by 25 or 50 basis points (bps) at its next meeting.

“At some point we won't need to increase rates by 50 bps at each meeting and we're getting closer to that point,” he told the committee. 

He assured that rate increases will be done in a way that keeps the economy on “an even keel”.