The Reserve Bank of Australia says it will need to lift the official cash rate at least two more times to ensure the “scourge” of inflation is contained. RBA Governor Lowe advised further rate rises are needed to curb inflation and to help tackle the cost-of-living crisis.
In a speech on Thursday, two days after the RBA announced it was lifting the cash rate by 50 basis points to 2.35% – the highest level since 2015, Lowe (RBA Governor) said ‘’the board was committed to doing what was necessary to ensure that inflation returned to target over time’’.
The RBA are concerned about the Australian public’s expectation that wages will rise as the cost of living rises and the effect this will have on inflation. Lowe stated “If workers and businesses come to expect higher inflation, and wages growth and price-setting behaviour adjusts accordingly, the task of navigating that narrow path will be very difficult, if not impossible. A shift higher in inflation expectations will require higher interest rates. In time that would mean a sharper slowing of the economy. It is in our national interest that we avoid this.”
Lowe said wages growth had picked up but not nearly to the same extent as the United States.
“This is an important difference. While there are some areas where wages are rising very quickly in Australia, aggregate growth in wages has not responded materially to the higher inflation and is not inconsistent with inflation returning to target over time. “It is important that this remains the case and that we avoid the cycle of higher inflation leading to higher wages growth and then higher inflation – a cycle like that would end in higher interest rates and a sharper slowing in the economy. It damages our standard of living, creates additional uncertainty for households and businesses, erodes the value of people's savings and adds to inequality. Without price stability, it is not possible to achieve a sustained period of low unemployment. It is important, therefore, that this current surge in inflation is only temporary and that we once again return to the 2% to 3% range.’’
Now an interesting point to note about the above is that these comments made in September by the RBA Governor are looking in the ‘rear view mirror’ after seeing the June quarterly economic growth figures, which were pretty solid. They were still strong because the first interest rate rise was only made in May 2022 and the economy was emerging from the Covid lockdowns. So here’s where it gets interesting, because armed with the September quarterly economic data, it will give the RBA and economic analysts the benefit of seeing the impact of all the interest rate rises since May. If economic growth is slowing (due in the main to a lowering of household consumption), wage pressures remain contained, and inflation is easing, we may very well also see an easing of the size of the rate increases? Perhaps 25 basis points rather than the recent 50 basis point increases for two months out to December 2022? Of course I’m not looking at many other matters that impact our economy eg: immigration & skilled labour intake, war in Ukraine, slowing Chinese economy. The latter being very important to Australia as it is still a major trading partner for mining exports.
For mortgage borrowers the capacity to refinance and /or restructure debt for a better deal is becoming increasingly difficult. These rate rises cut deeply into borrowing capacity, particularly as wages have not been rising to the same extent as the overall cost of living. It requires good advice to negotiate this.
Please contact Michael to discuss (02) 65832211