RBA boss Philip Lowe gave no clues about how many more mortgage bill hikes are coming in his first public remarks of 2023 – except to say that he doesn’t think “we’re at the peak yet”.
“How far we have to go up? I don’t know,” Dr Lowe said on Wednesday.
Sandwiched within an extended grilling about his conduct as RBA governor during Senate Estimates hearings were, however, several nuggets that provide fresh insight into how the RBA is thinking about reducing inflation and, ultimately, pausing its rate hikes.
Dr Lowe said the drivers of inflation in Australia are changing; explained that a recent upswing in wages growth isn’t evidence of a price spiral (at least not yet); and revealed what a “soft landing” for Australia looks like.
Obviously, none of that is any real comfort for families paying more than $10,000 a year extra on their mortgage bills.
But the RBA boss, who said he has been visiting community groups in Perth and financial counselling centres in Sydney, did say “harrowing” stories about mortgage hardship were leaving him with a “heavy heart”.
“People are really, really hurting – I understand that,” Dr Lowe said.
Inflation ‘way too high’
But if there was an over-riding message in Dr Lowe’s remarks it wasn’t one of pity for people with mortgages or a pledge to ease their suffering.
Instead, the RBA boss was forthright: Inflation is still “way too high”, he said, and the interest rate hikes needed to deal with it aren’t over.
“If we don’t get on top of inflation, it means even higher interest rates and more unemployment,” Dr Lowe said.
“We aren’t at the peak yet,” he also said, later in the estimates hearings.
It’s easy to see why Dr Lowe is worried. Both underlying and headline inflation are more than double the RBA’s 2 to 3 per cent target band.
And as things stand the RBA doesn’t expect that to change until 2025.
In Dr Lowe’s mind, higher rates are the only path to lower inflation. But senators wanted to know how much pain households must endure first.
He responded by saying the current 3.35 per cent cash rate target was “restrictive” – that it is helping curb inflation – but the full impact would not be felt until later this year, with consumer spending set to slow down.
The big question, however, is how much spending slows, particularly as some economists are tipping three more rate hikes to 4.1 per cent.
No evidence of wage spiral (yet)
Dr Lowe was concerned on Wednesday that consumer spending would not slow in response to rate hikes as desired, and that workers will get much higher pay rises in response to inflation, fuelling more price hikes.
This phenomena is called a “wage-price spiral” and if it becomes entrenched, then economists fear it will be much harder for the RBA to reduce inflation.
Dr Lowe said he doesn’t see any evidence a spiral is occurring right now, even though wages growth has picked up from earlier historic lows.
But he did say the RBA remains worried about it because the cost would be “very high”.
“If we saw that develop we’re going to have higher interest rates and higher unemployment,” Dr Lowe said.
RBA seeks a ‘soft landing’
With wages growth remaining around forecast levels – about 4 per cent in 2023 and 2024 – Dr Lowe thinks Australia can achieve what he called a “soft landing” from this recent spate of high inflation and rate hikes.
Such a scenario would be one in which unemployment did not rise from 3.5 per cent to more than 5.3 per cent, which is the level recorded before COVID-19, he said.
The RBA currently forecasts inflation at 4.3 per cent during 2024.
Dr Lowe rejected suggestions the RBA was trying to crash the economy into a recession with its nine rate hikes in a row.
“We want to get inflation down because it’s dangerous,” Dr Lowe said.
“It’s corrosive. It hurts people. It damages income inequality, and if it stays high, it leads to higher interest rates.
“We want to get inflation down, but we also want to preserve the gains in employment that we’ve made.”
Power bill sting eased
One tailwind that will help push inflation down is actually supply side.
Both Dr Lowe and Treasury secretary Steven Kennedy told estimates on Wednesday that power bill relief unveiled by governments last year will have a marked impact on reducing inflation and household power bills.
The market intervention, which includes energy bill subsidies and caps on coal and gas prices, could reduce headline inflation by between 0.50 and 0.75 percentage points, according to fresh Treasury analysis.
“The government’s recent initiative will reduce inflation,” Dr Lowe said.
This doesn’t mean power bills won’t rise in 2023 (they will), it’s just that fears of a 50 per cent-plus increase are much less likely to happen now.
