RBA boss Philip Lowe’s warning on interest rate rises as inflation worsens

Philip Lowe has hinted at worsening interest rates while issuing a grim warning about inflation, with even more dire predictions for 2023.

Reserve Bank governor Philip Lowe has indicated interest rates may need to be hiked even higher during Australia’s cost of living crisis, saying that the bank will be “very carefully” watching inflation over the summer.

“We need to bring inflation back to target and I think it will require higher interest rates and our forecasts have been prepared on that basis,” Mr Lowe said during a speech to business leaders in Hobart on Tuesday.

“We are not on a preset path here.”

Inflation is set to hit 8 per cent by the end of 2022 according to the RBA. (AAP Image/Lukas Coch) NO ARCHIVING

Senior economists have predicted that the RBA will lift the cash rate by at least another 25 basis points by the end of the year, with Westpac predicting that the rate could peak at 3.85 per cent next year.

Mr Lowe indicated rate hikes could become more aggressive in response to ever-rising inflation.

“If we need to step up to larger increases again to secure a return of inflation to target we will do that,” he said.

Just how aggressive the hikes will be will rely on how the Australian economy unfolds over the next few months.

“Similarly, if the situation requires us to hold steady for a while, we will do that,” he said.

A mortgage of $1 million has seen monthly loan repayments increase by more than $1500 since May according to RateCity. Picture: NCA Newswire / Gaye Gerard

“Given the uncertainties regarding the outlook, we will be watching very carefully how the economy and the inflation pressures evolve over the summer.”

The RBA lifted Australia’s cash rate another 25 basis points to 2.85 per cent on Tuesday, a smaller rise than previous months, but Mr Lowe indicated the central bank would be carefully looking at the effect of current rates on the economy and considering larger rises in the immediate future.

Inflation is now predicted to reach 8 per cent this year, much higher than the 2-3 per cent target set by the RBA, a goal Mr Lowe said he was “committed to doing what’s necessary to achieve”.

“The board is seeking to return inflation to two to three per cent, while at the same time keeping the economy on an even keel. I think it is still possible to do this,” he said

The average Sydney mortgage holder can expect to be hit with a $115 lift to their monthly mortgage repayments after the 25bp rise in the cash rate. (Photo by Lisa Maree Williams/Getty Images)

“But there is a lot of uncertainty at the moment, and we could be knocked off that narrow path particularly by business abroad.”

With homeowners already struggling to keep up with the rising cost of mortgage repayments, Mr Lowe flagged the dangers of not lifting the cash rate to combat inflation.

“The eel of inflation will be with us for longer [if we don’t lift rates] and the eventual increase in interest rates needed to bring inflation down will be even larger is would increase the risk of a seed, severe recession, and a sharp rise in unemployment,” he said.

Mortgage holders with a loan of $500,000 are now paying $760 more per month than they were in May according to RateCity.

That number jumps to $1,140 per month for a $750,000 loan and $1,520 per month for a $1 million loan.

Treasurer Jim Chalmers has expressed sympathy for mortgage holders struggling with repayments.

House prices have continued to fall as the RBA lifts interest rates. (Photo by Lisa Maree Williams/Getty Images)

“This is another difficult day for Australians who are already under the pump,” Treasurer Jim Chalmers said shortly after the latest cash rate decision was handed down.

The pressure is especially sharp for those in Sydney and Melbourne, where house prices are highest.

The 25 basis point lift to the cash rate will cause an increase of $115 per month for the average Sydney mortgage holder, based on the median loan size of $768,000, according to PropTrack.

The median mortgage for a Melburnian is currently $644,000, meaning that those residents can expect to pay an average of $96 more per month after this rate hike.

Mr Lowe also flagged potential issues that could be problematic when trying to bring down inflation.

“In the short term, the east coast floods are adding to the upwards pressure on food prices, and next year there are likely to be very large increases in the prices that households pay for gas and electricity,” he said.

The cost of food has risen by 9 per cent in the past year. Picture: NCA NewsWire / Nikki Short

“This means Australians with a mortgage will have to find that little bit extra in their monthly budget to accommodate these interest rates.”

Grocery prices continue to skyrocket, with fruit and vegetables alone jumping 16.2 per cent in price in the past year according to the Australian Bureau of Statistics (ABS).

Dairy products have shot up by 12.1 per cent in the past 12 months while bread and cereals have risen by 10 per cent.

Fruit and veggies have seen the highest jump in prices as regular flooding impacts supply. Picture: NCA NewsWire/ Gaye Gerard

Electricity prices are also set to explode through 2023, forecasts in the Federal Budget have foretold.

Retail power prices are tipped to soar by around 20 per cent by the end of the year, before ballooning by at least 35 per cent in 2023.

However, the RBA Governor did affirm that Australia was in a better economic position than other countries.

“For the first time in 50 years, it is possible for us to say that most Australians who want a job can get one,” he said.

“Our public services are generally high quality and our public sector finances are in better shape than most other countries, and our natural assets mean that Australia is well positioned for the clean energy transition that we need to make.