Reserve Bank governor Philip Lowe has defended his COVID response, saying that pinning interest rates to the floor in 2020 was the “right policy choice” – even though it pushed up inflation.

In remarks on Wednesday morning, Dr Lowe acknowledged growing anger at soaring prices and recent sharp rate hikes, but reassured Australians that inflation should soon start falling.

He admitted the record low interest rates from 2020 to 2022 helped push inflation to a two-decade high, saying the RBA and governments had a “very strong insurance mindset” at the onset of COVID-19.

“We wanted to do what we could to provide insurance for Australians against the potentially catastrophic economic consequences of the pandemic,” Dr Lowe said.

“With the benefit of hindsight, it could be argued that we took out too much insurance, but that’s the nature of insurance, isn’t it?

“If the event you’re insuring against occurs, you’re really glad you are fully insured, but if the event doesn’t occur you’re left questioning your decision.”

“Judgments will differ as to whether we overinsured or not, but in the highly uncertain environment of the time, the right policy choice was to err on the side of too much insurance.”

The RBA faces fierce public criticism for its interest rate decisions during the pandemic, amid growing fears about the highest inflation rate in decades and the interest rate hikes designed to contain it.

Households with typical variable rate mortgages are paying $350 more every month as a result of RBA rate changes passed on since May.

Meanwhile, the cost of living is outpacing income growth, squeezing the budgets of Australian households at the supermarket and petrol pump.

And against this backdrop the RBA itself faces further scrutiny.

On Wednesday, Treasurer Jim Chalmers unveiled a wide-ranging review of the bank, which will probe Australia’s inflation target and whether the RBA board has done enough to achieve it.

“Australia is facing a complex and rapidly changing economic environment, as well as a range of long-term economic challenges,” Dr Chalmers said.

“This is an important opportunity to ensure that our monetary policy framework is the best it can be, to make the right calls in the interests of the Australian people.”

The RBA is already warning more rate hikes will be necessary to bring inflation back into the target in coming years, with Dr Lowe reiterating on Wednesday that more needed to be done before inflation came down.

However, he said there were signs price growth should begin falling in the next 12 months, as global supply chain disruptions are resolved and prices for commodities such as oil ease from near record levels.

“For inflation to return to the 2–3 per cent target range, a more sustainable balance between demand and supply is needed,” Dr Lowe said.

“Higher interest rates will help achieve this through moderating growth in aggregate demand.

“With the COVID emergency now over, so too is the time for emergency settings of monetary policy.”