In just one word, the RBA has reinforced how important economic growth will be before official interest rates begin to rise

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For several months the Reserve Bank of Australia (RBA) has indicated that the next move in official interest rate is likely to be up rather rather than down, underpinned by the belief that faster economic growth and tighter labour market conditions should help to gradually boost wage pressures and lift underlying inflation back to the midpoint of its 2-3% target.

If all goes to plan, the RBA will lift interest rates for the first time since late 2010.

However, in a speech to the Australian Industry Group luncheon today in Melbourne, RBA Governor Philip Lowe introduced a caveat on the view that the next is likely to be higher.

Here’s the paragraph in question. Our emphasis in bold.

The national accounts provided confirmation that the Australian economy is moving in the right direction. If this continues to be the case, it is likely that the next move in interest rates will be up, not down.

The national accounts Lowe refers to is Australian GDP.

If the acceleration in the March quarter report released last week is maintained, on average, throughout this year and next — something the RBA currently expects — then the next move in the cash rate is likely to be up, not down.

However, if it’s not, sluggish economic growth will make it harder to lower unemployment and boost wage and inflationary pressures, creating the alternate scenario where the next move could be potentially down, not up.

We’re still a long way from the latter scenario playing out, but it does provide the RBA a get-out clause should the need arise.

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