Lowe ‘impotent’ in inflation crisis as experts call for shift to fiscal policy after RBA decision

The Reserve Bank is now “impotent” and more rate hikes, as foreshadowed in Tuesday’s decision, will do nothing to further tame inflation, an economist says.

The Reserve Bank’s decision on Tuesday to leave the cash rate steady at 4.1 per cent is welcome news for Australian mortgage holders, but a hint of further increases has sparked a warning from one economist that doing so would do little to further fight inflation.

The RBA maintains its aggressive monetary policy of lifting the cash rate from 0.1 per cent last April to 4.1 per cent has been to curb inflation, and hinted that further tightening could be needed in the months ahead to drive it down further.

While inflation is still higher than the bank’s target of two to three per cent at 5.6 per cent in May, it is past its peak and trending downwards, and some experts say the focus needed to now turn to supply issues, warning hiking rates would have little impact in further taming inflation.

Deloitte Access Economics partner, Stephen Smith, said the decision to hold steady was consistent with the “fact” that central banks are “impotent” in the face of “supply-side inflation pressures”.

RBA Governor Philip Lowe said the board had decided to leave rates steady but warned further monetary tightening could be needed. Picture: NCA NewsWire / Martin Ollman

He said it was notable Governor Lowe had dropped reference to the economy remaining on “an even keel”.

“The pace of inflation has peaked and is moderating, wage growth is not excessive, medium-term inflation expectations are not rising, and the RBA’s own research shows that at least half of inflation in Australia over the past year has been driven by supply factors,” he said.

He said monetary policy was a “spent weapon”, and the focus needed to now shift towards “fiscal policy, investment and innovation to lift productivity, competition policy to improve efficiency and erode market power, and tax policy to boost prosperity”.

“We’ve been saying for months the RBA should leave rates on pause,” he said.

“In a world where inflation is driven by supply, interest rate rises aren’t effective and there needs to be a turn towards fiscal policy.”

The government has welcomed the board’s decision to hold rates steady. Picture: NCA NewsWire / Nikki Short

Finance Minister Katy Gallagher said the government was “working alongside the Reserve Bank, not against it”.

She said the government’s commitment to save, where appropriate, rather than spend had put the budget in a better position than a year ago, and would help ease the inflation problem sooner than later.

“The decision today is welcome news, and I know for households across Australia it will be welcome news,” she said.

“We remain absolutely focused on the job that we have to do, which is providing cost of living relief where we can, without adding to inflation, investing in more productive and resilient economy.”

Governor Philip Lowe said the decision to pause had in-part been because higher interest rates were working “to establish a more sustainable balance between supply and demand”, but also because the economic outlook was surrounded by so much uncertainty.

He said while inflation had passed its peak, it would continue to remain “too high” for some time yet, hinting at further rate rises in the months ahead to get it back under control as soon as possible.

“If high inflation were to become entrenched in people’s expectation, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment,” he said.

“For these reasons, the Board’s priority is to return inflation to target within a reasonable time frame.

“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable time frame, but that will depend upon how the economy and inflation evolve.”

Dr Lowe said the pause would allow the Board to take further stock of the state of the economy, the economic outlook, and “associated risks”.

Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia, said while the rate pause was welcome news for struggling mortgage holders, he warned there was “still a hawkish tone” in Tuesday’s statement.

“The RBA will be very sensitive to any upside surprises in the upcoming CPI print,” he said.

“The upside risks to inflation cited last month are still present, and we expect to see two more rate hikes in the coming months.”

NAB executive Megan Bond said the bank’s economics team were predicting “another couple of rises”.

“While the news is positive today, this is the time for people to take advantage of the pause and plan ahead to work out if there are simple changes you could make to future-proof your budget and get ahead after the last 12 rate rises,” she said.

“ If you can manage it, one thing to consider is topping up your home loan offset account to help save on interest.

Barclays Australia said they believed the RBA was now closer to the end of its aggressive hike series.

“We expect one final hike in August before the bank goes on hold. We expect cuts to start in quarter one 2024,” they said in a statement.

Originally published as Lowe ‘impotent’ in inflation crisis as experts call for shift to fiscal policy after RBA decision