RBA governor Philip Lowe says end of money printing does not mean rate hike imminent

The Reserve Bank governor has moved to ease concerns that an interest rate hike is imminent, again citing a need for higher wage growth.

The head of the Reserve Bank has moved to soothe fears that an interest rate hike is imminent, telling Australians there is ample time to get unemployment lower without the economy getting an uppercut from out-of-control inflation.

In an eagerly awaited speech at the National Press Club, RBA governor Philip Lowe said it was “too early” to conclude that underlying inflation had reached a point that necessitated a rate hike, although he did admit prices had accelerated faster than he expected.

With a red-hot economy and low rates stoking fears inflation will get out of hand, economists have widely tipped a rate hike in the middle of the year – far sooner than the RBA has previously flagged, and a prospect that has wreaked havoc on financial markets.

But despite recently lifting his near-term inflation outlook, Dr Lowe insists that Australia can afford to be patient in its quest to achieve ‘full employment’, especially as pandemic-fuelled supply chain disruptions smooth out over the months ahead.

Banks have already lifted fixed rates ahead of any RBA cash rate hike. Picture: Gaye Gerard / NCA NewsWire

Dr Lowe told his audience in Sydney that he expects the Omicron-hit economy to bounce back strongly in the coming months as the RBA pushes towards an “historic milestone” of an unemployment rate below 4 per cent.

But Dr Lowe also downplayed the inflationary pressures gripping markets, and the chances of a near-term rate hike.

He also said a sharp acceleration in wages growth would also be needed before any such move is considered.

“In terms of underlying inflation, we have just reached the midpoint of the target range for the first time in over seven years,” Dr Lowe said.

“And this comes on the back of very significant disruptions in supply chains and distribution networks, which would be expected to be resolved over the months ahead.

“We are in the position where we can take some time to obtain greater clarity on these various issues.”

Some economists, however, questioned whether Dr Lowe’s narrative was out of synch with the RBA’s forecasts.

RBA Governor
"I think when interest rates go up this time, the household sector will be quite responsive to it"#ausbiz#ausecon@CommSec#commsec@RBAInfo

— CommSec (@CommSec) February 2, 2022

The Commonwealth Bank’s Gareth Aird said the central bank’s upgraded outlook on inflation and unemployment - released on Tuesday - suggested it was on the cusp of normalising the cash rate, but Dr Lowe’s rhetoric on Wednesday strongly pushed back against on this notion.

“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 wrote.

“That is the nature of forecasts though. It is only after the event that you can determine if the forecasts have been achieved.”

Mr Aird also wrote that while the RBA was prepared to be “patient” on the cash rate, “patience” had not been defined.

“The RBA wants the annual rate of wages growth to be ‘3 point something’ to ensure inflation is ‘sustainably within the target’,” Mr Aird said.

“But we are none the wiser on whether that means the Governor wants to see the annual rate have a 3 handle on it before the cash rate is lifted or if a six month annualised rate of 3 per cent or above is sufficient.”

Dr Lowe’s speech, titled “The Year Ahead”, comes a day after the central bank held firm on the historic low cash rate of 0.1 per cent after its first board meeting of the year.

Dr Philip Lowe says the RBA is in no rush to introduce a rate hike. Picture: NCA NewsWire / Jeremy Piper

The RBA also brought an end to its $350bn money printing program – with final bond purchases to cease on February 10 – echoing a move that was signalled by the US Fed in December.

Dr Lowe has previously said there will not be a rate hike until at least 2023, but the strength of Australia’s economic recovery has led economists and financial markets to tip an August rise, with July or June as an outside chance.

Wednesday’s speech appears to be an attempt to hose those fears down.

Banks have already been moving in anticipation of a cash rate hike, with Canstar reporting there were more than 6000 fixed interest rate hikes over the past six months, leaving variable rates the last remaining bargains.

“The board is prepared to be patient as it monitors the evolution of the various factors affecting inflation in Australia,” Dr Lowe said.