MNI: RBA's Lowe Notes Supply Issues, Expects Further Hikes

Reserve Bank of Australia Governor Philip Lowe has pointed to population and housing, electricity price growth and productivity as key supply-side issues that will inform how the board makes future decisions, adding he expects further tightening "may well be needed".

Speaking at the National Press Club today in Sydney, Lowe noted the complexity of inflation increases when supply-side issues are persistent, leading to stubborn price increases. “Here there is a greater risk that inflation expectations and price- and wage-setting behaviour adjusts,” Lowe said. “If this were to occur, a more decisive monetary policy response would be required.”

Lowe pointed to the increasing cost of energy as having an important bearing on decision making. “The price of electricity, as measured in the CPI, increased by 12% last year and we are expecting a further increase of around 15% this year,” he said.

He also noted not enough homes were being constructed to keep pace with migration and predicted rents will continue to increase, putting further pressure on inflation. The economy would also need to grow more slowly unless productivity lifts, Lowe added, pointing to the Productivity Commission’s reform recommendations which he said should be implemented.

“I am raising these supply-side issues because they matter for inflation, and they help shape the context within which the board makes its decisions,” he added.

The monthly Consumer Price Index fell to 6.8% y/y in February from January’s 7.4% – the second consecutive monthly fall, according to Australian Bureau of Statistics data published last week (See: MNI BRIEF: Lower Feb CPI Print Adds to RBA Pause Case). The indicator peaked at 8.4% in December 2022. Housing rose 9.9%, food and non-alcoholic beverages increased 8%, while transport added 5.6%.

PAUSE CONSISTENT

Lowe said Tuesday’s pause was consistent with the Reserve's past practices of waiting to assess swift interest-rate increases. "In those earlier cycles, it was common for the board to move interest rates multiple times, then wait for a while to assess the pulse of the economy, and move again if the situation warranted doing so," he noted.

The RBA decided to hold rates steady on Tuesday, its first pause since it started hiking rates from its record 0.1% floor in May 2022. The Reserve reiterated the view that the full effect of its 350bp hike had not fully worked through the economy, despite households increasingly feeling the pressure of higher interest rate payments (See: MNI RBA WATCH: Rates on Hold, Bank Charts Cautious Path).

"The decision to hold rates steady this month does not imply that interest rate increases are over," Lowe continued. "Indeed, the board expects that some further tightening of monetary policy may well be needed to return inflation to target within a reasonable timeframe."

The RBA will next focus on the headline quarterly CPI figure which will be published on April 26. The Reserve expects March quarter consumption to be lower than the December quarter print (see chart below).