‘Be prepared’ for hikes: RBA governor Philip Lowe admits rates may rise this year

The RBA has continued to prepare borrowers for the end of pandemic-era policy settings, conceding for the first time official interest rates could start to rise this year.

RBA governor Philip Lowe conceded that faster than expected progress on jobs and inflation ‘brings forward’ the timing of rate increases.

The Reserve Bank has stepped up its work to prepare borrowers for the end of pandemic-era policy settings, conceding for the first time that official interest rates could start to rise as soon as this year.

It comes after a bad month for shares, as a hawkish Fed sparked fear of aggressive US rate rises to combat inflation, tipping cold water on a strong bull market fuelled by unprecedented stimulus during the pandemic.

In his National Press Club speech on “The Year Ahead”, RBA governor Philip Lowe said Australia had “just reached the midpoint of the target range” on underlying inflation due to “very significant disruptions in supply chains and distribution networks”, which were expected to be resolved soon.

The nation was “on the cusp of this historic milestone” of sub-4 per cent unemployment for the first time in five decades.

“I think we can test how far we can get the unemployment rate down without having an inflation problem in the country, and that’s worth doing,” Dr Lowe said in a question-and-answer session.

“And I’m hoping that we get further good news over the course of this year and as we make further progress towards full employment and we can sustain inflation of roughly 2½ per cent, we will be able to normalise monetary policy. I hope and expect that to ­happen.”

But while again pushing back on early rate rises in the speech, he later conceded that faster than expected progress on jobs and inflation “brings forward” the timing of rate increases.

His comments came after the bank predicted above-target inflation for the next two years and the lowest unemployment rate since the early 1970s, following monetary and fiscal stimulus during the pandemic.

Dr Lowe later repeated that stronger than expected jobs and inflation had brought forward the timing of rate rises, but “whether that happens this year or not remains to be determined”.

“It’s certainly a plausible scenario that rates go up later this year, but there are a lot of other scenarios as well,” he said. “There are a lot of uncertainties both on the supply side and in the labour market … we can wait to see how those uncertainties are resolved.”

Asked whether people should fix their mortgage rates, Dr Lowe told borrowers to “make sure you have buffers” and “be prepared” for higher interest rates. Interest rates “will go up at some point”, but “I can’t tell you when”.

Dr Lowe’s admission that rate rises could start this year was “the major difference between his first public speech of 2022 and those from last year”, said Citi Australia chief economist Josh Williamson.

Mr Williamson said Dr Lowe was effectively “guiding the market for the start of a monetary tightening cycle later than the market is pricing”.

The money market expected four rate rises to lift the cash rate to 1.08 per cent this year.

Dr Lowe appeared to be aiming to start lifting rates late this year or in early 2023, while ­arguing that Australia’s price and wage metrics meant the RBA did not need to match other central banks, said Mr Williamson, who continued to predict that rate rises would start in August.

CBA’s head of Australian economics, Gareth Aird, said the market was “none the wiser” on whether the RBA wanted to see an annual rate of wages growth at 3 per cent or higher before it lifted the cash rate, or if a six-month annualised rate of 3 per cent would be sufficient.

Mr Aird said Dr Lowe was “opaque around exactly what sort of wages print or series of wages prints would be the catalyst for the board to hike the cash rate”, and the RBA wanted the annual rate of wages growth to be “three point something” to ensure inflation was “sustainably within the target”.

“Nonetheless we expect the inflation, wages and labour market data will be sufficiently strong over coming quarters for the RBA to hike the cash rate in August 2022,” Mr Aird said.

Based on the RBA’s forecasts “one could easily conclude that the RBA is on the cusp of normalising the cash rate” from a record low of 0.1 per cent, yet Dr Lowe ­argued it was too early to conclude that inflation was “sustainably in the target range”.

“In other words, the RBA’s central scenario puts inflation sustainably in the target range, but the governor has said that it’s too early to conclude the forecasts will be achieved,” Mr Aird added.

Mounting evidence of accelerating wages growth pointed to an August rate increase.

Official data, private surveys and CBA’s internal data that captures salaries paid into CBA bank accounts indicated that wages growth accelerated late last year and early this year.

“An acceleration in wages growth is the natural response to a tight labour market,” Mr Aird said.

Dr Lowe said the RBA’s business liaison program found more than half of businesses still plan to increase headcount over the ­coming months, very few expect to ­reduce their workforces, staff turnover had risen and there were ongoing reports of difficulties finding workers for certain roles.

But Dr Lowe said the RBA had “no contemporary experience as to how labour costs will evolve in a world where the national un­employment rate is below 4 per cent”.

“We do know, though, that wages growth remained modest a number of years ago when the unemployment rates in NSW and Victoria were temporarily around 4 per cent,” he said.

It was also unclear whether and at what pace the demand for goods would normalise as infection rates fell, and there was uncertainty on how fast the supply and distribution problems would be resolved.

Dr Lowe could not rule out the possibility that some of the recent price increases are reversed as a more normal balance between supply and demand is re-established.

The RBA did not have a “specific definition as to what ‘sustainably in the target range’ meant for inflation – the rate, trajectory, outlook, breadth of price increases and the factors driving them,” Dr Lowe said.

Similarly, the RBA didn’t have a “specific rule or benchmark” on wages growth.

Originally published as ‘Be prepared’ for hikes: RBA governor Philip Lowe admits rates may rise this year