The Reserve Bank governor, Philip Lowe, says he has heard about the personal pain caused by soaring interest rates with a “very heavy heart” – but tackling “dangerous” inflation was critical even if the moves were unpopular.
Lowe, making his first public appearance for 2023 before Senate estimates on Wednesday, reiterated the challenges of achieving a “fairly soft landing” for the economy with unemployment rising only to 4.5% during next year.
“We are trying to navigate a narrow path here. We want to get inflation down because it’s dangerous,” he said. “It’s corrosive, it hurts people, it damages income inequality and if it stays high, it leads to higher interest rates and more unemployment.”
Lowe’s comments came eight days after the central bank lifted its key interest rate for a ninth consecutive meeting to 3.35%. While the hike was widely anticipated, the RBA’s view was that it “expects that further increases in interest rates will be needed over the months ahead”, a hawkish stance that surprised most observers.
“I don’t think we’re at the peak yet but how far they need to go, we’re still unsure,” he told senators on Wednesday.
Ahead of RBA Governor Philip Lowe's appearance before senate estimates today, investors were predicting the cash rate to peak at about 4.1%. They are also pencilling in a 75% chance of another 25bp rise on March 7th to 3.6%. pic.twitter.com/6W9NHdMcDW
— @phannam@mastodon.green (@p_hannam) February 14, 2023
As to the need for the record series of rate rises, Lowe said people “had forgotten” about the damage inflation causes to the economy since the last big bout 30 years ago.
“Our job as the country’s central bank is to make sure [a repeat] doesn’t happen and part of the way we do that is to remind people of the dangers of it,” he said. “If we return to that world, you’ll have all these nasties again.”
“We’re here to help people, keep their savings safe, low inflation, get them jobs,” he said.
Lowe said “retailers tell us demand has been strong”, with restaurant prices up 2.1% in the latest quarter and 7% over the year. Travel and accommodation prices were also rising.
“There is increasingly a demand element to the inflation,” he said. “We’re hoping that – we’re starting to see some evidence of this – that demand is moderating and the rate of increases in these areas will come back at the same time the supply-side problems will fix up as well.”
Lowe conceded that wage increases had so far been low. But he would continue to draw attention to the risks “not because I’m overly worried about that at the moment” because of the costs should a wage-price spiral begin.
A “critical issue” was what Australians did with their huge pool of excess savings – “as large as anywhere in the world” built up during the pandemic – which now amounted to more than 20% of one year’s disposable income for a household.
“Do they see [it] as just an increment to their wealth that they can spend over coming years? Do they view it as a piggy bank that they can go and use over the next little while?” Lowe said. “[W]e don’t know the answer to that and it’s one reason we’re watching the spending data very, very carefully.”
Similarly, the RBA was speaking to banks about how mortgage holders on fixed-interest rates would cope with a sudden shift to higher variable rates. Some 800,000 such loans will face sharply higher repayment costs in 2023.
Still, data on those behind by 90 days on repayments was “almost a record low”, while those behind by 30 days had “ticked up a bit but it’s still low and the banks say people are still paying their mortgages”, Lowe said.
The governor dismissed concerns aired by Coalition senators that comments by government ministers had undermined the central bank’s independence. “I don’t feel like there’s an attack on the bank or its independence,” he said. “But it’s noisy.”
Lowe added that fiscal policy from the federal government was “broadly neutral from a demand management side”.
“The government is saving most of the terms of trade as a revenue boost, so that’s positive,” he said. “It would be problematic if that were not the case … and I welcome that.”
The governor addressed criticism about his private lunch with bankers before the release of the RBA’s quarterly statement on monetary policy, and over his not making other public speeches before the Wednesday hearing.
“I can’t live in a bubble. I need to talk to people. I need to hear what financial markets say and I like asking people questions,” Lowe said. Still, “we’ll no longer do those type of lunches before the release of the statement on monetary policy”.
During that private meeting at local bank Barrenjoey, Lowe said he “shared the messages” in the public statement accompanying the rate rise, and sought views about issues. These included the resilience of household spending, and likely changes in the labour market and wage rises.
He downplayed a report in the Australian Financial Review that bond yields had risen during and after the lunch. “Exactly the same movements were happening in the New Zealand market at the same time,” Lowe said, adding that yields on Australian debt had “almost exactly the same as the movement” as their US equivalent.
“They’re the facts as I know it. I can’t say any more,” he said. “We’ve investigated it thoroughly, and that’s what we’ve found.”
