The Reserve Bank governor Philip Lowe flagged further rate rises will be needed to tame inflation when he appeared before a parliamentary committee on Wednesday in his first public address of 2023.
Lowe said that while he was sensitive to the impact of increasing interest rates on households, rising inflation posed a greater threat.
These are five important takeaways from his address to Senate estimates on Wednesday.
1. Inflation is too high and rates need to keep rising
Lowe told the Senate committee that the series of rate hikes that has pushed the official cash rate to 3.35% likely has further to run.
“I don’t think we’re at the peak yet but how far we have to go up I don’t know,” he said. “It will depend upon inflation data, resilience, spending, and what’s happening with wages.”
Given inflation is the RBA’s primary consideration, Lowe’s concern over the financial stress caused by rate rises on Australians is tempered by his view that rising inflation is worse.
At 7.8%, inflation is “way too high” and needs to come down, Lowe said.
He said after a long period of stable conditions, Australians have forgotten about the dangers of inflation, and that the central bank’s job is not to let it get out of control.
“People really forgot about how corrosive inflation was and how it eroded your savings,” he said.
“How it made income inequality worse. How it really hurt the poor. So I think we have forgotten about that because it’s 30 years since we lived in that world.”
Inflation last ran hot in Australia in the 1980s with an annualised inflation rate of more than 8%, before the start of the recession in late 1990 led to a quick drop.
“I know it’s really hard for people to pay more on their mortgages, but it will be harder still if inflation gets too high and stays too high,” Lowe said.
2. Lowe is not resigning
Lowe has faced intensifying criticism for the increasing mortgage and rental costs, after RBA guidance in 2021 that rates were unlikely to rise before 2024. There have now been nine consecutive rate rates.
When pointedly asked why he deserves to retain his job, Lowe defended the central bank’s policies and noted that such decisions were the collective responsibility of the nine-person board he chairs.
“I have a seven-year term as the governor of the bank and I intend to serve out that term. It’s an important job, it comes with public accountability and this is part of the process.
“It would be a very bad outcome for the board if it had to resign.”
Lowe’s term ends on 17 September, and some parliamentary members have already stated their opposition to his possible reappointment for a second term.
The governor also spoke about how “personally disturbing” he finds it to hear of people’s financial strains due to rising rates.
“A lot of people write to me at the moment telling me about their personal circumstances,” Lowe said.
“I read those letters and hear those stories with a very heavy heart.”
3. The RBA is not trying to cause a recession
The RBA might want to slow spending and bring down inflation, but it’s not trying to crash the economy, said Lowe.
“We are trying to navigate a narrow path,” he said.
“We want to get inflation down but we also want to preserve the gains in employment we made.”
At its last reading, Australia’s unemployment rate was at a seasonally adjusted 3.5% in December, hovering near half-century lows.
That rate is expected to increase as the impact of cash rate rises flows through the economy, slowing spending and tempering business expansion.
How high will the unemployment rate need to go to get inflation down to the RBA’s 2-3% objective?
Lowe said while he didn’t have a specific answer to that question, the bank is forecasting an unemployment rate of 4.5% next year, which he believes would put Australia on track to eventually bring inflation down to 3%.
He conceded that wage increases had so far been modest.
4. No more private lunches before major announcements
Lowe addressed unease over a private lunch, hosted by investment bank Barrenjoey, which he spoke at earlier this month before the release of the RBA’s quarterly statement on monetary policy.
He said that while it was not inappropriate to attend the event, he said he would no longer do those types of lunches before the release of policy statements.
“There’s nothing untoward here. It’s appropriate,” Lowe said.
“I can’t live in a bubble. I need to talk with people. I need to hear what financial markets are saying and I like asking people questions.”
In response to questioning, Lowe said he also meets with groups outside the financial industry for feedback, citing a meeting with the Australian Council of Social Service.
5. RBA believes its policies are not the main driver of high rents
Australia is facing a near wall-to-wall rental crisis, defined by strong demand that is exceeding supply, pushing up rents.
Lowe said that a lack of housing supply, rather than rising interest rates for landlords, is the primary driver.
“It’s clear that when interest costs go up some landlords want to pass that on in terms of a higher rent,” Lowe said.
“But I also know that they can only do that successfully if the supply-demand balance in the market is such that people will pay the higher rent.
“All the evidence is it is the vacancy rate that ultimately determines how fast rents rise.”
Vacancy rates around the country are averaging just 1.2% across all capital cities, according to data from CoreLogic, leading to fierce competition among tenants.
