Lowe warns against rent freezes as he signals rates may rise again

Outgoing Reserve Bank governor Philip Lowe has signalled interest rates could rise further while warning against rent freezes and handouts for home buyers, and said only a greater housing supply would help a market distorted by the most expensive land in the world.

In his last appearance at a House of Representatives’ economics committee hearing before handing over to deputy Michele Bullock next month, Lowe also admitted he had made mistakes during the COVID-19 pandemic, that had contributed to today’s inflation pressures.

Outgoing RBA governor Philip Lowe, at his final appearance before estimates, warned against rent freezes. Credit: Alex Ellinghausen

And he urged policymakers to consider changes to the way the entire economy was operated, arguing monetary policy alone was a blunt instrument that would be more effective if governments were more directly involved in day-to-day economic management.

The bank has lifted the official cash rate by 4 percentage points since May last year, the most aggressive tightening since the 1980s. Inflation has eased over the past six months but remains elevated at 6 per cent.

While unemployment is sitting around 3.5 per cent, both the RBA and the federal Treasury are expecting economic growth to slow. The bank is forecasting the economy to grow by just 0.9 per cent this year.

Lowe said it was too early to declare victory over inflation, warning cost pressures – particularly for services – could force the Reserve into more rate rises.

“It is possible that some further tightening of monetary policy will be required to ensure that inflation returns to target within a reasonable timeframe,” he said.

“Whether or not this is the case will depend upon the data and the [bank] board’s evolving assessment of the outlook and risks. It is encouraging that the recent data are consistent with inflation returning to target over the next couple of years.

“The data are also consistent with the Australian economy continuing to travel along that narrow path that I have spoken about for some time.”

The bank is forecasting inflation to get back to 3 per cent by mid-2025. Pressed by independent MP Allegra Spender if the bank had considered trying to get inflation down to its 2-3 per cent target range next year, Lowe said it could be done.

But that would require interest rates to be pushed up another full percentage point, which would slow the economy and drive up unemployment.

National cabinet will next week discuss a string of proposals aimed at addressing growing pressures in the rental market, amid calls from the Greens for a nationwide two-year freeze on rents.

Lowe likened rent freezes to giving people more money to buy increasingly expensive houses, and said the best way to deal with rents and high-priced homes was to boost housing supply.

“They’re short-term fixes that both, in my judgment, make the situation worse,” he said. “In most cases, rent controls reduce incentives to add to supply.

“The solution lies in increasing supply.”

Lowe, who called on state and local governments to deregulate zoning and planning laws, said Australians were being priced out of a home by expensive land.

“That is debilitating from many economic and social and personal perspectives. Housing is expensive not because the cost of building a house or an apartment is expensive, it’s the land,” he said.

He made the comments as Housing Industry Association and CoreLogic research showed land prices soaring across the country. In the past three years, the median price of land in new residential blocks has jumped by 23 per cent, after a 5 per cent increase in the three years before that.

On a square-metre basis, land prices in Sydney have reached $1827. A decade ago, land in the city was $610 a square metre. Melbourne’s average land price has reached $1058 a square metre, more than double the $476 of mid-2013.

Brisbane ($715) and Hobart ($482) have experienced land price increases much larger than the overall inflation rate, which has lifted by 30 per cent over the period.

While the RBA has lifted interest rates to deal with inflation, Lowe conceded the Reserve and other central banks had contributed to the current inflation problem with their COVID-era policies.

He said the RBA, which cut the cash rate to 0.1 per cent and created hundreds of billions of dollars to support the economy, was warned during the pandemic that unemployment could reach 15 per cent and that it might take five years for the medical community to develop a vaccine.

All that monetary policy support had helped the economy but was also contributing to today’s inflation.

“If we had a better understanding we would have responded differently,” Lowe said.

“It turned out we provided too much support and perhaps too much insurance.”

Bullock will take over from Lowe, who has served as governor since 2016, in mid-September.

Lowe said the use of interest rates to target inflation had clearly worked over the past three decades, but noted there had to be other ways to manage the economy.

He said he was disappointed the recent Reserve Bank review had not canvassed other options that would more directly involve governments in managing economic issues day-to-day.

“In principle, I think there is a better way of doing it,” he said.

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