By Rachel Clun and Shane Wright
Reserve Bank governor Philip Lowe has rejected calls to resign, saying he has helped deliver the lowest unemployment in half a century while conceding Australians face another year of financial pain before inflation falls to meet wages growth.
Lowe, in a defiant address on Thursday that acknowledged the bank’s troubles in managing the economy, signalled that interest rate rises would be smaller in coming months as the combined 2.25 percentage points of interest rate hikes took effect.
RBA governor Philip Lowe said the bank was doing some “soul searching” over its inflation forecasting.Credit: Oscar Colman
But in a sign of what he described as the bank’s “soul-searching” over its recent performance, Lowe conceded the RBA had made a “very large forecast miss” with its predictions late last year around the nation’s rate of inflation.
This week, both Greens treasury spokesman Nick McKim and Nationals senator Matt Canavan demanded the governor resign over his handling of monetary policy, as households continue to face hits to their budgets with higher mortgage repayments and wage growth below the rate of inflation.
Delivering the annual Anika Foundation address, Lowe said he would not quit as the bank’s successes in boosting employment among women and young people had bolstered the country’s economy despite the effects of the pandemic.
“I can assure you I have no plans to resign,” he said. “The economy is so much better than what people thought was going to be the case.
“Interest rates are higher, and I know people don’t like that, but you should be welcoming a stronger economy.”
The RBA board has aggressively raised the official cash rate from 0.1 per cent to 2.35 per cent over the last five months. That was after saying as recently as November last year that it was unlikely to change rate settings until 2024.
Lowe defended the sharp hikes, saying the bank was doing what was necessary to ensure the current rate of inflation is only temporary.
“High inflation is a scourge,” Lowe said. “It is important, therefore, that this current surge in inflation is only temporary and that we once again return to the 2 to 3 per cent range.
“I know this is difficult at the moment. It’s going to be difficult for the next year or so until inflation comes down.”
Inflation, now at 6.1 per cent, is expected to reach 7.75 per cent by the end of the year. Lowe said the sharp increase in interest rates from the historically low 0.1 per cent during the pandemic was to make sure that inflation did not stay high for long.
Last year, the RBA forecast inflation in 2022 would reach just 1.75 per cent.
“Forecast misses of this scale should lead to soul-searching by forecasters, and I can tell you it’s led to soul-searching at the RBA,” he said.
Earlier on Thursday, Treasurer Jim Chalmers was forced to defend Lowe following calls for the governor to resign, saying the governor had responded “pretty honestly and pretty openly” to criticism.
“For me as the country’s treasurer, it’s not for me to take potshots at Phil Lowe. My interest here is in reviewing the Reserve Bank, so we can get the right institutional settings,” Chalmers said on ABC News Breakfast.
Lowe said he never vowed to keep interest rates low into 2024, but actually said the RBA thought the pandemic would have lengthy and disruptive effects on the economy that would keep inflation low for some time.
“That meant that we were likely to keep interest rates low for a long period of time, out to 24, so it was highly conditional, we did not make a promise,” he said.
Data published this week showed consumer spending remained strong in the three months to June despite high inflation and two increases in official interest rates, and Lowe said the RBA was conscious there were lags between rate hikes and changes to consumer behaviour, and interest rates had risen quickly.
“We recognise that, all else equal, the case for a slower pace of increase in interest rates becomes stronger as the level of the cash rate rises,” he said.
The RBA is the focus of an independent review which has started private hearings and will later this month open for public submissions.
Lowe said the bank’s 2-3 per cent inflation target, which it has used since the early 1990s, may need to change.
“Many other countries have chosen 2 per cent as their nominal anchor. As part of the review, it is worth examining the arguments for and against a change to the nominal anchor,” he said.
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