Australia central bank sees risks from Ukraine, still patient on rates

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SYDNEY, March 9 (Reuters) - Australia's central bank head warned on Wednesday that the war in Ukraine was a new inflationary shock to the world economy but Australia still had time to assess the impact before likely raising interest rates later in the year.

In a speech on the economy, Reserve Bank of Australia (RBA) Governor Philip Lowe said the conflict was a major downside risk to the global economy, with the major impact coming through higher commodity prices and inflation.

The RBA would be watching to see if that in turn fed through to rising wage claims, although evidence so far suggested Australians were still getting pay rises under 3%.

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He noted underlying inflation in Australia had been running at 2.6% in the December quarter. This was well below levels seen in the United States and Britain, and well within the RBA's target band of 2-3%.

Analysts are forecasting core inflation could break above 3% this quarter, which could force a first rate rise as early as June, although Lowe argued for patience.

"The recent lift in inflation has brought us closer to the point where inflation is sustainably in the target range. But we are not yet at that point," he said.

"We can be patient in a way that countries with substantially higher rates of inflation cannot," he added. "Given the outlook, though, it is plausible that the cash rate will be increased later this year."

The cash rate is currently at a record low of 0.1% and has not been increased since 2010, so a hike will be a shock to borrowers given households hold record amounts of debt.

Lowe said there could be a risk in waiting too long on rates should inflation expectations become unanchored, but there were also risks in going too early.

In particular, Australia was near to achieving a jobless rate under 4% for the first time since the 1970s and it was worth waiting to ensure this outcome.

The unemployment rate hit a 13-year low of 4.2% in January despite an outbreak of the Omicron variant, and Lowe said the high level of vacancies suggested further jobs growth ahead.

Recent floods along the eastern seaboard of Australia would be a temporary drag on growth, but the RBA still expected the national economy to expand by a brisk 4.5% over the year.

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Reporting by Wayne Cole; editing by Richard Pullin

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