Reserve Bank of Australia governor Philip Lowe believes raising the cash rate too early from its record low of 0.1 per cent could put at risk an expected decline in the unemployment rate below four per cent.
He has told federal politicians there is no evidence in Australia that things are currently over stimulated, and while inflation pressures have picked up, they are not excessive
"If the economy continues to perform strongly there will come a point where we will want to normalise interest rates," he has told the House of Representatives economics committee via video link.
"But we are going to wait until we see the evidence that inflation has picked up in a sustainable way."
He said for the first time in several decades, inflation has become a major issue in the global economy.
The US reported annual inflation of 7.5 per cent, the highest level since February 1982, while at the same time wages are growing at the fastest pace in at least 20 years.
"In Australia, we too have had higher inflation than we and others expected, although the increase here is smaller than in many other countries," Dr Lowe said in his opening six-monthly address to the committee.
The consumer price index currently sits at at 3.5 per cent.
"We are feeling the effects of global supply-chain problems and higher oil prices, but we have not seen the same increases in goods prices as have occurred in the United States," he said.
At the same time wages growth has picked up recently, but only to the low rate prevailing before the COVID-19 pandemic and the vast bulk of Australians are still experiencing wages increase of no more than "two point something" per cent.
"There is, however, more than the usual degree of uncertainty around the outlook for inflation and wages," Dr Lowe said.
"It is still unclear as to whether, and at what pace, the demand for goods will normalise as infection rates decline."
Dr Lowe defended what had been the RBA's long-held position that conditions for an interest rate rise would not occur before 2024 based on its forecasts.
"From my perspective the benefit of that made it very clear to the community that the Reserve Bank was going to support the economy in what has been an extraordinary two years," Dr Lowe said.
He said the economy over the past year has done much better than the RBA thought and inflation has been higher than its forecasts, which were not that much different from market economists' forecasts.
"So we have all been surprised," he said.
"If that has damaged our credibility, I accept that. We don't have a crystal ball and we are living through incredibly difficult times and having to process in real time the effect of shocks that we have not dealt with before."
