Interest rates will be rising for the foreseeable future and the Reserve Bank of Australia will not hesitate in making higher increases than predicted if inflation does not begin to settle, the RBA governor, Philip Lowe, has warned.
Tuesday’s seventh interest rate hike saw the cash rate increase by the standard quarter of a percentage point, taking rates to a nine-year high of 2.85%, and Lowe said the RBA board would not hesitate to move to half percentage point increases if economic conditions didn’t improve.
Summer will be key, Lowe told a dinner in Hobart, where the RBA held its most recent meeting.
“The board’s base case remains that interest rates will need to go higher still to bring inflation back to target and our forecasts have been prepared on that basis,” he said on Tuesday night.
“We are not on a pre-set path, though. If we need to step up to larger increases again to secure the return of inflation to target, we will do that.
“Similarly, if the situation requires us to hold steady for a while, we will do that. Given the uncertainties regarding the outlook, we will be watching very carefully how the economy and the inflation pressures evolve over the summer.”
Lowe acknowledged the “narrow path” he said the bank was treading, as it attempted to balance rising inflation by limiting spending in the economy through the rate rises, with fears of a recession.
The bank wants to bring underlying inflation, the economic measure considered the “real” inflation figure as it excludes items with the largest price increases and falls, to between 2% and 3%. In the last Australian Bureau of Statistics CPI update, it was double that, at 6.1%.
Until that number begins to drop, interest rates will continue to rise.
What another 25bp in RBA rate rises would look like (assuming the banks pass it onto mortgage holders in full). Source: RateCity pic.twitter.com/lKexLmweUe
— Peter Hannam (@p_hannam) November 1, 2022
“I would like to take the opportunity to assure you that the board is resolute in its determination to return inflation to the 2% to 3% target range,” Lowe said.
“We will do what is necessary to achieve that. At our meeting today we discussed the damage that high inflation does to people; it is a scourge. High inflation devalues your savings. It worsens inequality in our society and it undermines our living standards.
“It hurts us all by impairing the functioning of our economy. It is for these reasons that the Reserve Bank board will make sure that this episode of high inflation is only temporary.”
Rising interest rates have already had an impact on the amount of mortgage stress Australians are feeling, particularly those who bought at the peak during the pandemic, when prices soared.
