Lowe: Rates Have Further To Go But Unsure How Much

RBA governor Lowe has appeared before the Senate Economics Committee and spoke very clearly and firmly that high inflation is “damaging” and “dangerous”. He was at pains to point out that if rates don’t rise to bring inflation down then the pain will be worse and rates will have to rise higher and push up unemployment further. He said that “we’re really serious about this”. This was followed by comments that rates need to rise further but that it is currently unclear as to how much more.

• Lowe noted that in Q4 that a quarter to a half of inflation was domestically driven but the RBA is now seeing evidence of a moderation in demand. Thus demand pressures on inflation should ease at the same time as supply-side issues are resolved.
• Wage growth is currently not overly concerning, especially as increases agreed are lower for 2024 than 2023. If this stays the case, then a soft landing can be managed. But Lowe noted that if the RBA is wrong on wages and they rise in line with inflation, then it would be very costly to the economy through a wage-price spiral.
• Monetary policy is restrictive as seen by recent economic developments but fiscal policy is neutral.
• In terms of governance, Lowe doesn’t feel that the central bank or its independence is “under attack” and it has had no pressure from Treasury on rates. He noted that interest rate rises are “unpopular” but that the Board does what is needed.
• On Lowe’s recent Barrenjoey meeting, he said that there was nothing “untoward” and that bond yields were moving before it took place. He noted the timing and said that the RBA has decided that these events won’t occur so soon after a Board meeting. He clarified that a press conference wasn’t held because of his parliamentary appearances and that it may be too much “talking”. He also said that he needs to talk to people and won’t “live in a bubble”.