Governor Lowe Will Hike If Needed, Rate Cut Talk “Way Too Early”

RBA Governor Lowe spoke before the National Press Club on “Monetary policy, demand and supply”. At the beginning he made it clear that because the Board paused on April 4 it doesn’t “imply that interest rate increases are over” but in the Q&A he said that it’s not 100% certain that they will need to rise again. He made it very apparent that the RBA will increase rates again if it has to and that it’s “way too early” to talk about cuts. The message was that decisions will be made each month and determined by the data.

• Global developments, household consumption and price- and wage-setting behaviour are the key factors for the outlook. Lowe also added details on why rental and energy inflation is so high and the importance of improving productivity growth to contain inflation. See speech here.
• Lowe reiterated that if inflation is not contained and returns to target then the impact is very damaging and that rates will need to rise by more and thus unemployment will too. In this context, he said that wage growth should be 2.5% plus productivity growth to be consistent with inflation but the current 3.5% is fine. He emphasised that it was very important that wages don’t chase inflation.
• One of the reasons the RBA has not been as aggressive in its tightening as other central banks is that it is prepared to take longer to return inflation to 3% (ie. mid-2025) so that most of the job gains from recent years can be preserved.
• Population growth has surprised the RBA to the upside and May’s GDP forecast will need to be adjusted to reflect that.
• The RBA looks at mortgage arrears very closely and it is still near the low. It has noted “a bit” of a slowdown in flows into mortgage offset accounts indicating that households have less spare cash.
• Given the budget on May 9, Lowe said it would be wise for the revenue windfall to be saved.