The Reserve Bank boss has warned households to brace for more rate rises – and taken aim at the Albanese government over inflation.
RBA Governor Philip Lowe said the board decided on Tuesday to keep rates on hold to give the aggressive interest rate hiking cycle to date time to work through the economy, noting interest rate movements tended to hit with a lag.
“Indeed, the board expects that some further tightening of monetary policy may well be needed to return inflation to target within a reasonable timeframe,” he clarified at a speech at the National Press Club in Sydney on Wednesday.
The decision to keep interest rates on hold at 3.6 per cent in April followed 350 basis points of tightening since May last year.
On Wednesday, Dr Lowe said a few lingering supply-side inflation drivers were complicating the board’s job to return inflation to target.
He said some supply-driven shocks, such as high shipping costs, had normalised as the pandemic recovery wore on but housing and energy remained two lingering sources of supply-side inflation.
Dr Lowe said the reopening of international borders was driving a sharp uptick in Australia’s population and that housing supply would take a long time to catch up to the shifting demographics.
Although the shortage of housing might trigger more people to form share houses and other shared living arrangements, he said supply and demand would likely remain unbalanced and keep rent inflation “quite high for a while”.
Dr Lowe also said global supply-side factors were largely responsible for high energy prices but if the transition to clean energy wasn’t done smoothly, prices might stay higher for longer.
Sluggish productivity growth was also flagged as a “general supply issue”.
He urged the federal government to “implement some” of the recommendations in the Productivity Commission’s recent five-year report to make the economy more inflation-proof in the future.
“Faster growth in productivity means that we can produce more with our resources,” he said.
“It means a bigger pie, higher real wages, a lift in our collective wealth and a more prosperous economy. It also means that, for a time, there is less upward pressure on inflation.”
Dr Lowe said if supply side issues lingered, the task of returning inflation to the bank’s 2-3 per cent target range would be challenged and a “more decisive” monetary policy response might be needed.
“The situation is more complicated when the supply-side issues are persistent, leading to persistently higher price increases in parts of the economy,” he said.
“Here there is a greater risk that inflation expectations and price- and wage-setting behaviour adjusts.”
The 10 consecutive hikes so far have jacked up borrowings costs for businesses and mortgage holders, with thousands of households with fixed-rate home loans due to feel the full weight of the rate increases when these offers expire this year.
Dr Lowe said the rapid rate of rises was likely over, but said “the decision to hold rates steady this month does not imply that interest rate increases are over”. He said dealing with soaring bills would be “harder, not easier, if inflation stays high for too long”.
The length the rates pause might be short. By the time it next meets on May 2, the RBA board will have March quarter inflation figures and have updated internal economic forecasts.
Finance Minister Katy Gallagher said while the pause would bring some reprieve, the federal government understood people were still under pressure financially.
“There are a number of mortgage holders – about one in five – that will face coming off those fixed terms and into variable rates throughout the course of this year,” she told ABC Radio National.
“We know that’s going to be pretty challenging for those households.”
– AAP
