An economist says it's time for the Reserve Bank to put its bazookas away, lest it find the economy veering off the "path of least regret".
Inflation recently climbed above 3.3 percent, outside of the central bank's target of between 1 and 3 percent a year. High inflation makes each dollar worth less, eroding people's incomes and savings.
The Reserve Bank last year began a programme of "effectively money-printing", says economist Cameron Bagrie, and cheap lending to banks to stimulate the economy and prevent a collapse in the wake of COVID-19.
It worked, with unemployment barely rising above 5 percent despite predictions it would go into double-digits and GDP growth quickly bouncing back. But it's also fuelled a rapid increase in house prices, and with the borders still tightly shut, unemployment is low and pushing upward pressure on wages, helping to drive inflation. Savings have also slumped, discouraged by record-low interest rates.
"Whatever the Reserve Bank does in the coming six to 12 months, they're facing a pretty delicate balancing act," Bagrie told The AM Show on Tuesday.
"On the one hand, the economic data is telling them to do the obvious - get interest rates up, reduce that monetary policy support. But of course as we've seen in Australia with the arrival of the Delta variant, you're only a couple - or in the case of NSW, a few hundred - cases away from a fundamentally different economic story.
"So the Reserve Bank is facing a really delicate balancing act over the coming three to six months. They know they need to go, but what they do is not without risk - the economic climate could change pretty quickly in the space of six months."
The Delta variant of COVID-19 has proven to be much harder to eliminate than the strains that previously made it into the Australian community. A new study has found infected people carry more than 1000 times the viral load of the original strain that was first detected in China at the end of 2019.
Even if there was an outbreak here, Bagrie isn't convinced the Reserve Bank's stimulus needs to carry on much longer. It has already stopped the Large Scale Asset Purchase programme of bond-buying ("money-printing", in Bagrie's words) that started in March 2020. He expects the cheap lending to banks to go next, followed by deployment of the "primary weapon" - a rise in the official cash rate.
"The Reserve Bank has talked an awful lot about what's called the 'path of least regret'. The path of least regret in 2020 was to bring out every bazooka you have and deploy them and get the economy back on track pretty quickly. What the Reserve Bank is now facing is the path of least regret - as inflation becomes a little bit more persistent - is stickier than what they'd like. So that's encouraged them to move."
ASB picks the Reserve Bank will raise interest rates in October, after another likely increase in inflation.
The next announcement is due on August 18.