Banking boss makes cash rate vow as homeowners brace for next rate rise

As Aussie households brace for yet more interest rate pain within days, the RBA governor has made one surprising promise.

Australian households are being stretched to the limit by our cost of living crisis and rising interest rates – but the Reserve Bank has some small comfort for those doing it tough.

While the RBA is all but certain to hike up the cash rate yet again when it meets next Tuesday, governor Philip Lowe told a UBS panel discussion in Zurich late last week that it wouldn’t be as large as many feared, claiming an interest-rate increase of 0.75 percentage points is “not on the table” this time around.

In fact, he said the central bank was not looking to impose any 0.75 percentage rise increases, and in July would likely consider “graduated steps”, meaning an increase of 0.25 or 0.5 percentage points was on the cards.

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RBA governor Philip Lowe says July’s rate rise may not be as brutal as many fear. Picture: Britta Campion/The Australian

In early May, the RBA lifted Australia’s official cash rate by 25 basis points to 0.35 per cent from 0.1 per cent – a more drastic rise than the 15 basis point hike most experts had predicted.

Then, in June, the board pulled another shock move, hiking the official cash rate by 50 basis points to 0.85 per cent and catching experts off guard with the so-called “super-sized” rate rise.

Dr Lowe’s latest comments seems to have poured cold water on suggestions the official cash rate would reach 4 per cent in 2022, as to do so, the RBA would have to announce at least one 0.75 per cent hike.

But he acknowledged the RBA only had a “narrow path” to rein in runaway inflation without in turn causing an economic downturn.

He warned that a change in the nation’s “inflation psychology” – which would see employees and companies doubt the RBA’s “credible path” back to a steady level of inflation – would cause more problems via ever-rising wages and prices, leading to drastically higher interest rates

“There is a path there to have inflation come down without the economy having too much pain, but it’s a narrow path,” Dr Lowe said.

The RBA’s last two rate rises caught experts off guard. Picture: NCA NewsWire/David Swift

He said changes were already afoot, with businesses feeling confident in jacking up prices which encouraged workers to demand pay rises.

“It’s not formal wage indexation, but it’s indexation of a kind because you can understand why people faced with high inflation want compensation for it, especially when the unemployment rate is as low as it is,” Dr Lowe said.

“So there’s a shift in the inflation psychology of the country, and it’s not really showing up in the survey-based measures of inflation expectations.

“If people start to worry that we can’t chart that credible path back, then I think the shift in psychology could be quite persistent, and we know where that ends.

“It ends in persistent inflation, and then you have to have much higher interest rates and the economic downturn to get inflation back down.”

Dr Lowe also said he believed inflation would start to ease in early 2023, although it would take “a couple of years” to move back to the inflation target of 2 to 3 per cent.