Reserve Bank boss Philip Lowe isn’t sure whether interest rates will need to rise again before the central bank is comfortable inflation is curbed – but he certainly isn’t ruling out another hike.
Speaking in Sydney on Wednesday just a day after delivering the first pause in interest rates since last May, Dr Lowe outlined a new phase in the RBA’s battle against rapidly rising prices.
He signalled that after almost a year spent hiking interest rates, the next few monthly decisions will be much closer calls.
“If we decide that we need higher interest rates to get inflation back to target over the next couple of years, that will be the trigger,” Dr Lowe told attendees at a National Press Club lunch.
“We think we may well have to increase rates again, but we’re not 100 per cent certain of that.”
RBA changes tone on rates
Dr Lowe’s remarks had a very different tone to those he made earlier this year, when he flagged several rate hikes would be needed after data released in January showed inflation hit 8.4 per cent late last year.
The RBA has spent months carefully softening that message, and on Wednesday Dr Lowe said an inflation rate of 3.6 per cent could be with us for some time.
There is growing evidence the economy is slowing as the existing tranche of rate rises and high inflation squeeze family budgets.
“The board is conscious that monetary policy operates with a lag and that the full effect of the increases to date is yet to be felt,” Dr Lowe said.
“It is also conscious that there are significant economic uncertainties at the moment,” he said, referring to bank failures in the US and Europe.
“Given these lags and uncertainties, the board judged that, with monetary policy now in restrictive territory, it was time to hold interest rates steady and accumulate more information.”
That “information” the RBA is looking for will centre on highly anticipated March-quarter inflation figures and upcoming figures on the jobs market in March, both of which are due in late April.
Basically, if the board is satisfied that inflation is falling fast enough to return to about 3 per cent over the next two years, then it could leave rates on pause at its May meeting.
But if Dr Lowe’s fears about faster wages growth amid a tight jobs market and consumer spending combine to make inflation too resilient, then mortgage bills will rise again.
“The decision to hold rates steady this month does not imply that interest rate increases are over,” Dr Lowe warned.
Impact more a ‘ramp up’
Dr Lowe said uncertainty about the outlook for rates is also being driven by the slow-moving impact of the central bank’s earlier policy moves.
Hundreds of thousands of home owners have yet to feel the pressure of higher rates because they fixed their loans during the pandemic years.
Most are rolling onto market rates in 2023 in what has been described in the media as a “mortgage cliff” – but Dr Lowe doesn’t see it that way.
He said that while the consumption effect from the flow through of rate hikes is tough to gauge, the impact on families is more of a “ramp up”.
That’s because most people have been expecting the squeeze, he said.
“The banks tell us the people who’ve already transitioned [from fixed rate to variable rate loans] are performing as well with their mortgages as the people who have variable rate[s]” Dr Lowe said.
Neither profits or wages drove inflation
Dr Lowe on Wednesday also weighed in on Australia’s wider debate about whether profits or wages have worsened the cost-of-living crisis.
He said current wages growth was consistent with falling inflation, and that pay rises to date had not been the cause of rapidly rising prices.
But neither have corporations, Dr Lowe said, with the data showing that the share of national income flowing into profits has remained steady outside of the mining sector, which has benefitted from global shocks.
“The share of national income that goes to profits is basically unchanged,” he said.
“What’s been happening is that demand is strong enough to allow firms to pass through the higher input costs into prices, so that firms have not suffered a decline in their profits as their costs have gone up.
“Most sectors have been able to pass on higher input costs into higher prices and have kept their profit margins the same.”
