RBA boss confesses major rate rise ‘likely’

The Reserve Bank governor says households should brace for further rate rises, as he makes an ominous prediction about house prices.

Households are all-but-certain to be hit with more mortgage pain next month with Reserve Bank Governor Philip Lowe declaring a rate rise of 0.25 or 0.50 per cent was likely.

Dr Lowe and members of the Reserve Bank faced a grilling in Canberra on Friday morning over the rapid interest rate rises which have added hundreds of dollars in monthly mortgage repayments to the average household.

A defiant Dr Lowe said the central bank was focused on reducing inflation from 6 per cent to the target 2.5 per cent – which will hurt households which borrowed huge sums when rates were at 0.1 per cent during the Covid-19 pandemic.

Dr Lowe revealed the Reserve Bank would consider a rise of 25 or 50 basis points at its next meeting in October as key labour and spending data indicates the Australian economy remains strong.

“We’re in this environment where consumer confidence is weak but people keep spending,” he said.

Reserve Bank Governor Philip Lowe says consumers are set to face more inflation and interest rates pain. Picture: Arsineh Houspian

“It’s one of the puzzles at the moment.”

He said the Reserve Bank did not predict house price changes, but said he would be “not surprised” if they fall by 10 per cent.

Dr Lowe said house prices “isn’t anything to do with the Reserve Bank” and said it was the fault of Australians’ desire to live in “fantastic cities on the coast” where land was limited and the cost high.

Dr Lowe warned if inflation remains high Australians would face “much higher interest rates”.

He said the size and timing of future interest rate increases would be guided by incoming data, and a pathway was not set in stone.

“The RBA will do what’s necessary to make sure the high inflation does not become entrenched,” he said.

“We need to make sure inflation returns to target in a reasonable time.”

Fuel and mortgage costs have risen significantly since the Reserve Bank last faced parliament in February. Picture: Tertius Pickard

He also moved to cool community anger over the bank’s comments in late-2020 that interest rates were not set to rise until 2024 and acknowledged making such predictions may have been a “mistake”.

However, Dr Lowe said the RBA’s prediction was mistakenly taken by some people as a “commitment or promise”, leading to households rushing out to borrow massive amounts of money.

He acknowledged the RBA would be “much less inclined” to make similar predictions in the future, but said households were crying out for clarity during the Covid-19 pandemic.

Dr Lowe acknowledged consumers had listened to the Reserve Bank, with 50 per cent of new loans taken out on a two or three-year fixed-rate basis.

The central bank is attempting to drag inflation down from 6 per cent now – and a predicted 7.45 per cent later in the year – to a 2.5 per cent target.

Dr Lowe, appearing with members of the RBA at the House of Representatives Standing Committee on Economics, said he understood the pain interest rate rises were having on families, but said it was critical to wrestling skyrocketing inflation.

He said the path of balancing addressing inflation with a strong economy was a “narrow one clouded by uncertainty”.

“Inflation has very quickly gone from being too low, to too high,” he said

However, a trifecta of global economic challenges could affect the Reserve Bank’s steady efforts to control inflation.

Dr Lowe said the US was facing a situation of high inflation, outstripped by wage growth, in Europe real wages were declining and China’s economy was suffering weak spending.

“Put all that together and the outlook for the global economy next year is quite weak,” he said.

Originally published as RBA boss confesses major rate rise ‘likely’