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The Reserve Bank governor has said he remains "committed to doing what is necessary" to prevent the "scourge" of high inflation taking hold, but did offer some hints that the pace of rate rises might soon slow.
Key points:
- Philip Lowe says high inflation is a "scourge" that must be stopped from becoming entrenched
- The RBA governor said a global economic slowdown and improved supply chains show signs of easing inflation pressures
- Mr Lowe said as interest rates get higher the case for slowing down increases becomes stronger
Speaking two days after the Reserve Bank raised interest rates for the fifth month in a row, Philip Lowe said it remained "committed to doing what is necessary" to get inflation back down to its target range of 2-3 per cent.
"High inflation is a scourge," he said.
"It damages our standard of living, creates additional uncertainty for households and businesses, erodes the value of people's savings and adds to inequality."
However, Mr Lowe also offered the strongest hint yet that the RBA was considering slowing down the pace of rate rises, the last four of which have been half a percentage point each.
"We are conscious that there are lags in the operation of monetary policy and that interest rates have increased very quickly," he said.
"And we recognise that, all else equal, the case for a slower pace of increase in interest rates becomes stronger as the level of the cash rate rises.
"But how high interest rates need to go and how quickly we get there will be guided by the incoming data and the evolving outlook for inflation and the labour market."
Some of the biggest influences on that economic data and inflation are out of the Reserve Bank's control, such as the Ukraine war and China's economic slowdown.
"Some slowing in the global economy will help bring inflation down, but a sharp slowing would make the job of delivering a soft landing here in Australia much harder," Mr Lowe cautioned.
Lowe rejects resignation calls
Mr Lowe also rejected recent demands for his resignation from members of the Greens and the Coalition.
"I can assure you I have no plans to resign," said the RBA governor, who has a year left to run on his current term.
Mr Lowe has been attacked for his statements up to late last year that interest rates were unlikely to rise until at least 2024, which some argue lured many people into taking on extra debts in expectation of lower rates for longer.
"I did not promise that interest rates wouldn't go up," he reiterated.
"I know many people interpret my previous statements as saying that but, if you look back carefully, I never said that.
"What we said was we thought the pandemic was going to have long lasting, disruptive effects on the economy that would keep inflation low, would keep unemployment high for years, and we wanted to do what we could to prevent that, and that meant that we were likely to keep interest rates low for a long period of time out to 2024.
"So it was highly conditional. We did not make a promise."
The RBA governor said people should instead focus on the positive economic outcomes, with unemployment at a 50-year low, under-employment falling and youth joblessness also historically low.
"Interest rates are higher, I know people don't like that, but you should be welcoming the stronger economy, and that's what I'd say to people who are kind of unhappy with the promise — wasn't a promise."
Energy, home building drive inflation surge
As for why the Reserve Bank got it so wrong, Mr Lowe took a not-too-subtle dig at the business economists in the audience.
"The RBA has plenty of company in not predicting this lift in inflation," he noted.
"Some forecasters were certainly expecting higher inflation than we were, but the magnitude of the pick-up in inflation has taken everybody by surprise."
The surge in energy prices, mainly triggered by Russia's invasion of Ukraine and the interruption of gas supplies to Europe, has been a key unforeseen cause.
"Analysis by the European Central Bank suggests that around three-quarters of the surprise in inflation in the euro area reflects unexpected developments in the markets for oil, gas and electricity," Mr Lowe said.
"In the United Kingdom, the Bank of England estimates that higher energy prices will directly boost CPI inflation by 6.5 percentage points this year.
"And in Australia, the price of petrol at the bowser increased by 32 per cent over the past year. The direct effect of this alone has been to add 1.2 percentage points to CPI inflation, and on top of this there are second-round effects of higher fuel prices."
However, Mr Lowe acknowledged there have been a few other major drivers of surging prices.
"Over the past year, the cost of building a new home has increased by 20 per cent. This alone has added close to 2 percentage points to headline inflation," he said.
"Very strong demand in this sector – partly due to low interest rates and government grants totalling up to $35,000 for some first home buyers – came up against COVID-related problems on the supply side."
Lowe wages warning
He also sent a warning shot towards those calling for bigger pay rises for workers, warning that this could further entrench inflation.
"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," he warned.
"A shift higher in inflation expectations will require higher interest rates. In time that would mean a sharper slowing of the economy."
Although Mr Lowe does not see any evidence of that happening so far.
"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," he added.
"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."
Live updates
By Bridget Judd
Key Event
Philip Lowe says those unhappy with higher interest rates 'should be welcoming the stronger economy'
The RBA governor says he knows people "don't like" higher interest rates.
"But you should be welcoming the stronger economy, and that's what I'd say to people who are kind of unhappy with the promise, wasn't a promise."
By Bridget Judd
RBA 'did not make a promise' interest rates wouldn't increase until 2024, Philip Lowe says
Mr Lowe says many people interpret his previous statements as saying that, "but if you look back carefully, I never said that".
"What we said was we thought the pandemic was going to have long lasting, disruptive effects on the economy that would keep inflation low, would keep unemployment high for years, and we wanted to do what we could to prevent that.
"And that meant that we were likely to keep interest rates low for a long period of time out to 2024.
"So it was highly conditional, we did not make a promise."
By Bridget Judd
Key Event
Philip Lowe says he has 'no plans to resign'
Asked how he would respond to those calling for his resignation in light of Tuesday's increase in interest rates, Mr Lowe says he has "no plans to resign".
"The unemployment rate in Australia today is the lowest in 50 years," he says.
"Labour force participation is at a record high, young Australians can get jobs in a way that they haven't been able to before, people are getting more hours of work and underemployment is down. That is a huge economic and social benefit."
He says in the end, he believes the RBA made the right choices.
"People have jobs. Kids have opportunity. Household incomes are rising. That's what I would say to people who don't like me and my job."
By Bridget Judd
Opening borders helpful, but RBA governor cautions 'thinking that it's a solution to the tight labor market'
Mr Lowe says opening the borders is helpful is addressing skills shortages, and "from that perspective, it's positive".
"But I just caution you in thinking that it's a solution to the tight labor market. Because when their project manager goes home from working for you, they've got to live somewhere.
"They occasionally go to the doctor, they go out they eat, they entertain themselves, maybe they have to educate their kids and when they do that, that creates more demand for labor."
By Bridget Judd
Inflation is protracted, and 'that's going to hurt low income people more so', Philip Lowe says
The RBA governor says he knows "it's very difficult for people to accept the fact that wages are not rising with higher inflation".
"That's very difficult and it's causing a lot of people distress.
"But the alternative is wages picking up with inflation, which means inflation is protracted, it means even higher interest rates later on, and even more unemployment later on.
"And that's going to hurt low income people more so. I know this is difficult at the moment, it's going to be difficult for the next year or so until inflation comes down."
By Bridget Judd
RBA governor say he's hopeful that inflation expectations 'remain contained'
Asked how much consideration he gives to the message from other central banks overseas that "inflation is intolerable and we need to hike aggressively", Mr Lowe says it is "certainly an important factor".
"But at the end of the day, our monetary policy is going to be determined by Australian specific conditions ... I'm hopeful that inflation expectations remain contained."
By Bridget Judd
The RBA spoke about households with savings buffers. Who are they?
That questions was just put to Philip Lowe.
He says they spent quite a lot of time trying to understand where the savings were.
"And the reality is that they mostly sit in the upper and middle income households. Many people who have white collar occupations are able to keep their jobs during the pandemic, they couldn't spend [money].
"So they kept their income and couldn't spend and the money went into their offset accounts. I think you saw in one of my graphs, excuse me, the very large rise in balances and offset accounts and that's mainly from middle and upper and upper income people.
"So we're very conscious of that and the fact that the higher interest rates [are] going to affect more people, people who have lower incomes and haven't built up the bigger buffers."
By Bridget Judd
How is the RBA considering the impact of interest rate rises on households?
Mr Lowe says it "might come as a surprise to you that some people wrote to me saying thank you for the higher interest rates".
"They rely on interest rates, higher interest income, so we're acutely aware that higher interest rates affect the community differently.
"And we spent a lot of time over recent years examining the various data set, disaggregated data sets, where we can see how consumption responds differentially across the income distribution.
"So that's what we're doing and we're going to continue to pay close attention to that."
By Bridget Judd
'The world is very uncertain and the economy needs to be flexible'
Asked about multi-employer bargaining, Philip Lowe makes a more general point about uncertainty and the economy.
"The world is very uncertain and the economy needs to be flexible in response to that uncertainty," he says.
"We've got a flexible exchange rate, flexible monetary policy and hopefully some flexibility with fiscal policy. We need to be flexible in the labor market."
By Bridget Judd
RBA governor Philip Lowe is taking questions
Reserve Bank governor Philip Lowe is now taking questions after Tuesday’s interest rate rise.
He's told audiences he remains "committed to doing what is necessary" to prevent the "scourge" of high inflation taking hold.