Reserve Bank governor Philip Lowe and fellow senior executives fronted the economics committee of the House of Representatives on Friday for about three hours.
Here are six things we learned.
Interest rate pain is ‘extremely uneven’
Even with the record run of interest rate rises by the RBA – already nine monthly meetings in a row with more likely – the spread of pain for borrowers is “extremely uneven”, assistant governor Brad Jones said.
On the one hand, half of all owner-occupiers were more than one year ahead on their mortgage repayments, and a third were more than two years ahead.
At the other end, “we observe around 10% of variable rate owner-occupied borrowers who have got virtually no spare cashflow after they meet their mortgage payments and their living costs”, Jones said.
These households – a “reasonable share” on low incomes – also had very low savings buffers, and hence “a limited ability to cut down on consumption”.
“There is no question there is a segment of the community that are hurting now and that is very likely to continue,” Jones said, adding that matter “certainly features very prominently” in the RBA’s internal discussions.
Labour market still ‘tight’ despite two months of job losses
The net loss of about 35,000 jobs in December and January hasn’t swayed the RBA in its intent to keep hiking interest rates to bring inflation back to its target of 2%-3%. (The RBA’s preferred inflation gauge was at a record 6.9% in the December quarter.)
The January figures, in particular, demonstrated how typical seasonal shifts “have gone awry” because of the Covid pandemic, senior RBA economist Luci Ellis said. More people were taking time off, using built-up leave, and there is “an additional 100,000 people waiting to start a new job in January” than was usual in the past.
“The labour market is a bit less tight than it was a few months ago but we would still regard it as being tight,” Ellis said. High numbers of job ads and vacancies were among the clues.
Consistency key to managing public and media’s expectations
Lowe is not for super-sized interest rate rises or pauses, if he can avoid them.
“[If] you are doing it consistently over a number of meetings, that keeps public attention on monetary policy and the seriousness of the task that we have,” Lowe said.
“So when we are changing them each month, that gets a lot of coverage ... people focus on it incredibly strongly.
“The world is uncertain, and when it is uncertain, it is better to move consistently and predictably rather than in steps.”
The RBA, though, is not keen to resume board meetings in January, having scheduled a summer break for the month each year since 1993. “In January, people don’t want to hear about interest rates,” Lowe said.
Bank competition is softening the blow of RBA hikes
Commercial banks remain eager to grab market share, a sign of confidence in the market but also one that softens the impact of the higher official rates.
Of the 300 basis points of increases in the cash rate prior to last week’s 25bp hike, mortgage holders had only seen rises of 260bp, Lowe said.
“[There] is competition for new borrowers and there is this discounting,” Lowe said. “I encourage people to do it.”
Savers, though, have not enjoyed as much fervour for their deposits. Treasurer Jim Chalmers has ordered the competition watchdog, the ACCC, to probe the laggardly increases in deposit rates from most banks, and Lowe said savers should shop around.
“[If] you are unhappy with the interest rate your bank is paying, go to another one because there are some very good deals out there,” he said, noting some offer 4% or more.
Electricity price relief – of sorts – is on the way
Echoing the treasury secretary, Steven Kennedy (who is also on the RBA board), RBA officials said the Albanese government’s intervention to cap gas and coal prices would cut next year’s inflation rate by half a percentage point, with consumer rebates promising to trim another quarter-point off.
Back in November, prior to the price caps, future wholesale prices were running above $200/megawatt-hour, coming down to about $150/MWh, Ellis said.
“Now the peak is more like $140 and it comes down to more like $100 over the subsequent years,” she said, adding the price limits were one factor.
“Since then, energy prices around the world have come back to roughly where they were at the beginning of the year, pre-invasion [of Ukraine by Russia],” she said. “That is true for thermal coal and gas and oil.”
Interest rates aren’t likely to fall soon
Lowe noted that money markets were betting interest rates will only start to fall well into next year. (They currently imply a peak rate of 4.1% by mid-year and the first cut about a year later.)
One “plausible scenario” is that Australia gets “on top of inflation, if inflation expectations stay well-anchored, the supply-side problems get fixed up, wage growth and wage setting doesn’t move up too fast”, Lowe said. Then the country could return to the “narrow path” of bringing inflation down without stalling the economy.
“It is possible but there are other scenarios as well,” he said.
Still, at this point, Lowe said there are no particular fears that disturb his slumber: “I’d like to be in the media less but apart from that nothing keeps me awake at night.”
