Michael Janda* says RBA governor Philip Lowe has warned that pause ‘does not imply that interest rate increases are over’.
The Reserve Bank boss has warned households to brace for more interest rate pain, especially if businesses keep putting up prices or workers demand bigger pay rises.
Speaking at a National Press Club lunch in Sydney, RBA governor Philip Lowe told the gathered reporters that yesterday’s pause after 10 consecutive rate rises should not be interpreted as a peak in the cash rate.
“The decision to hold rates steady this month does not imply that interest rate increases are over,” he said, echoing his post-meeting statement yesterday.
“Indeed, the board expects that some further tightening of monetary policy may well be needed to return inflation to target within a reasonable time frame.”
During the question and answer session, Mr Lowe emphasised that further rate rises were far more likely in the short term than any rate cuts, but the decisions would be made “month-to-month”.
“We’ve got the highest inflation rate in 30 years, the lowest unemployment rate in 50 years, and still two years before we get inflation back to the top of the target range,” he exclaimed.
“So I think it’s too early, way too early, to be talking about interest rate cuts and the balance of risk lies to further rate rises.”
But before implementing more rate rises, Mr Lowe said it was “prudent” for the RBA board to have more time to assess the effects of the large interest rate increase already implemented.
The length of time required may be short, with the bank due to receive March quarter inflation figures from the Australian Bureau of Statistics and update its internal economic forecasts before the next meeting in May.
Households feeling the pinch
After yesterday’s decision, the bank noted signs that consumer spending was easing fairly dramatically from post-pandemic highs, a trend it expects to continue as the full effect of already implemented rate rises hits household finances.
Mr Lowe said this is a sign rate rises are working as intended, with high inflation also contributing to weaker consumer demand.
“So the higher interest rates are biting, we know that,” he told the gathered reporters.
“The cost-of-living pressures are biting as well. Many people are finding their real incomes going backwards and that’s affecting their spending.
“And the fact that we now see kind of clear evidence of the higher interest rates and the cost-of-living pressures biting is one reason why we thought it was appropriate to hold steady this month and just wait a bit, take the pulse of the economy and reassess.”
Mr Lowe confirmed the bank had recently increased its forecasts of the share of income rising mortgage payments would soak up, with Australians seeing a much faster and stronger pass through of rising rates than borrowers in most other comparable nations.
“This increase in mortgage rates has had a significant effect on household budgets and we anticipate that required mortgage payments will reach a new record high of almost 10 per cent of household disposable income by the end of next year,” Mr Lowe noted.
“While many households have built up large buffers in their mortgage offset accounts, around 30 per cent of owner-occupiers with variable-rate loans have an offset or redraw balance of less than three months’ repayments.
“And there are still many fixed-rates borrowers to transition to higher variable rates.”
Mr Lowe also acknowledged the role that overseas banking ructions have had, with the potential for them to weigh on global (and therefore local) economic growth, even if the Australian banking system remains largely untroubled.
“The past week or so has seen financial stability concerns ease a little, but even so the recent problems will result in tighter financial conditions around the world as banks reassess risk and seek to reassure depositors that their funds are secure, including by taking a more cautious approach to lending,” he observed.
“It is still unclear what effect this will have on global economic growth, but it is another headwind.”
Stable profits and slow wages growth keeping rates lower
Mr Lowe ended his prepared remarks with another shot across the bows of both business owners and workers, warning that large price or wage increases could force the bank’s hand into “a more decisive monetary policy response”.
“Looking forward, it is important that wage increases remain broadly consistent with the inflation target and that a widening of profit margins does not become a source of ongoing upward pressure on prices,” he said.
“The more that prices and wages respond to higher inflation, the greater the need will be for interest rates to respond too.”
Provided that those factors remain under control, Mr Lowe indicated that the Reserve Bank is willing to be more patient than some of its global peers in getting inflation back within its target range of 2-3 per cent.
“Some other central banks are getting inflation back down more quickly,” he observed, in a potential dig at the Reserve Bank of New Zealand, which raised its cash rate by another half-a-percentage-point today and is forecasting a recession.
“We have discussed that in our board meetings, whether it’s beneficial to get inflation back down to 3 per cent a year earlier, there’s argument for that, but it would mean job losses, more job losses.
“And our judgement at the moment is that, if we can get inflation back to 3 per cent by mid-2025, and preserve many of those job gains that had been delivered in the last few years, that’s a better outcome than getting inflation back to 3 per cent one year earlier and having more job losses.”
*Michael Janda is the ABC’s Online Business Reporter.
This article first appeared at abc.net.au.
