The Reserve Bank of Australia won’t hesitate to push through even bigger interest rate hikes if they’re needed to to fight the “scourge of inflation”, its governor has foreshadowed.
While painting a rosy picture of Australia’s place in the world compared to the majority of other countries, RBA governor Philip Lowe said the cash rate would likely keep climbing, and put on the table the possibility of more rises double that seen yesterday.
“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 told the RBA board dinner in Hobart last 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.”
The comments were broadly similar to Lowe’s statement yesterday afternoon after hiking interest rates by 25 basis points to 2.85 per cent, the highest since April 2013.
But he went further in describing the board’s willingness to return to the major half-percentage-point hikes seen for four months earlier this year, while the RBA rapidly pushed the cash rate up from historic lows.
Lowe also stressed board members were conscious of the strain constant rate rises were putting on households already battling with high petrol prices and ballooning grocery bills.
“This morning, we also discussed the consequences of not raising interest rates, and allowing high inflation to persist and become entrenched in expectations,” he said.
“If this were to happen, the evil of inflation would be with us for longer and the eventual increase in interest rates needed to bring it down would be greater.
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“This would increase the risk of a severe recession and a sharp rise in unemployment. It would be much better to avoid such a costly outcome and so we have acted strongly to avoid it.”
With rates now at more “normal” levels, Lowe said the board was currently happy to move more slowly as it waited to assess the rate rises’ lagging effects on the economy.
He repeatedly stressed the “narrow path” the bank was on to force inflation back down to 2-3 per cent while keeping the economy on an “even keel”.
“It is still possible to do this, but there is a lot of uncertainty and we could be knocked off that narrow path, not least because of developments elsewhere in the world,” the governor said, noting the east coast floods were driving up costs and predicted 50 per cent energy bill increases in 2023 would do likewise.
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Yesterday’s hike adds about $74 a month to the average Australian’s $500,000 mortgage, or $760 a month compared to the rate in May this year.
Million-dollar borrowers should be paying roughly $1500 more on their monthly repayments than before rates began rising.
The RBA expects inflation to peak at 8 per cent by the end of the year – higher than the Federal Budget forecast of 7.75 per cent.
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