Interest rate pause is coming but not just yet: RBA governor Phil Lowe

The Reserve Bank is closer to pausing interest rate rises, Governor Philip Lowe has promised, as he cautioned home buyers that inflation is still too high and needs to be brought down “fairly soon”.

A day after the RBA lifted official interest rates for a record 10th consecutive time, to an 11-year high of 3.6 per cent, Lowe used a speech in Sydney on Wednesday morning to argue more rate rises were still on the horizon.

RBA governor Philip Lowe says a pause in interest rate increases is closer, but warns inflation is still too high.Credit:Oscar Colman

Lowe told the Australian Financial Review’s Business Summit the bank was watching the flow of economic data very closely while also being aware of the growing pressure on households struggling under the weight of high inflation and increasing interest rates.

He said the bank had the flexibility to respond to changes in the economic outlook, and that included taking a decision to pause at some point in the future.

“Our judgement, though, remains that further tightening of monetary policy is likely to be required to bring inflation back to target within a reasonable timeframe,” he said.

“Inflation is still too high and while it looks to be on a declining path it is likely to remain higher than target for a few years. If we don’t get inflation down fairly soon, the end result will be even higher interest rates and more unemployment.

“With monetary policy now in restrictive territory, we are closer to the point where it will be appropriate to pause interest rate increases to allow more time to assess the state of the economy. At what point it will be appropriate to pause will be determined by the data and our assessment of the outlook.”

Treasurer Jim Chalmers said on Wednesday morning the government was hopeful inflation was starting to come under control.

“We think inflation has peaked, there are encouraging signs … but we think it has, and inflation will moderate over the course of the next 12 to 18 months,” Chalmers told RN Breakfast.

Lowe said at every RBA board meeting, the bank was trying to manage two risks – not doing enough to bring down inflation and doing too little that would mean inflation remained too high for too long.

He said the initial increases in rates last year had removed the “extraordinary” support for the economy provided during the COVID pandemic, while more recent increases were aimed at ensuring high inflation was only temporary.

“It is a complex environment in which to be making policy decisions, with many of the variables we monitor at near record highs or lows. The inflation rate is at a three-decade high,” he said.

“The unemployment rate is around a five-decade low. Australia’s terms of trade are close to their highest level ever. There has been a record boost to savings over recent years and interest payments as a share of household income will soon be at a record high.

“At the same time, measures of consumer confidence are as low as they have been in a long while. This all means that there is range of scenarios for the economy and there are uncertainties in both directions.”

A key concern of the bank has been of a prices-wages spiral, pushing up inflation to higher levels.

Lowe said recent figures including the wage price index and income data contained within the national accounts both suggested the risk of a wage spiral was abating.

“These data suggest that the risk of a prices-wages spiral remains low. This is helpful as we navigate that narrow path and it means that Australia is in a better position than some other countries,” he said.

“Notwithstanding this, we remain alert to the risks here given the combination of a tight labour market, the high level of capacity utilisation and the run of high inflation numbers.

“If this risk did materialise, the costs would be very high. In particular, if prices and wages were to chase one another, the end result would be persistently high inflation, even higher interest rates and higher unemployment. It is in our collective interest to avoid this.”

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