RBA boss Philip Lowe says Australia faced with two ‘difficult positions’

Reserve Bank boss Philip Lowe says Australia has two “difficult” choices regarding inflation and interest rates.

The Reserve Bank governor says Australia is faced with two difficult choices when it comes to interest rates.

Philip Lowe told a parliamentary economics committee that the central bank had to choose between “some pain now” until real wages “hopefully” start rising, and the risk of “not doing anything” to counter inflation.

With inflation running at a 30-year high of 6.1 per cent, the RBA has successively lifted the key cash rate target cent since May to 2.35 per cent.

It had been set at a historic low of 0.10 per cent in November 2020 in a bid to ease the economic crunch of the Covid-19 pandemic and associated lockdowns and job losses.

Dr Lowe has been put in the hot seat at a hearing on Friday examining the central bank’s five-month streak of rapid rate hikes as part of its mission to return inflation to between 2 and 3 per cent.

He has attracted criticism over the central bank’s decision to hike interest rates at such a fast pace, particularly given he indicated late last year that rates would remain low until 2024.

Reserve Bank governor Philip Lowe appeared before an economics committee on Friday. Picture: NewsWire/Monique Harmer

He said on Friday he had never promised or committed to that timeline, but he accepted people understood his “conditional” statements as such.

Dr Lowe said he knew 2022 had been “very difficult” for many Australians, particularly those “without buffers”.

“But if we manage this well as a country, we can look forward to prosperity again,” he said.

“If we say, well, it’s all too hard, we don’t want to cause any pain for anyone, we’ll put that at risk.”

Dr Lowe said the alternative to lifting interest rates would be “allowing higher inflation to become entrenched”, which would damage the country’s “economic prospects”.

Dr Lowe said inflation should drop down towards 4 per cent by the end 2023 after peaking at close to 8 per cent later this year.

But he said the RBA was forecasting inflation to remain above 3 per cent in two years.

“And the longer it stays above 3 per cent, the more difficult it’s going to become,” he said.

“And if that happens, then we have higher interest rates and a recession, which is damaging.

“So we’ve got two difficult kind of positions at the moment: some pain now and hopefully real wages start rising again next year against the risk of not doing anything, just sitting on our hands and having inflation stay higher.”

Dr Lowe said interest rates weren’t set in stone longer term, but they were likely to hover around a more “normal” level once inflation settled down.

“I think we’ll cycle around some number between 2.5 per cent and 3.5 per cent. It’s hard to be specific, and (it) will cycle up and down with the economic cycle,” he said.

“So we’re closer now to that, aren’t we? We’re 2.35 per cent, so we’re getting to that range that you think is normal but probably still on the low side.”

He said interest rates would only return to near-zero levels if Australia experienced another steep economic downturn such as the one it went through at the beginning of the pandemic.

Dr Lowe says inflation should drop down towards 4 per cent by the end 2023 after peaking at close to 8 per cent later this year.

HOUSE PRICES MAY FALL BY 10 PER CENT

Dr Lowe has said wouldn’t be surprised if Australian house prices fall by an average of 10 per cent.

Dr Lowe said he thought house prices could fall but it was unlikely they would return to pre-pandemic levels given how much they surged by over the past two years.

“It’s hard to forecast asset prices and prices went up 25 per cent over the past two years – a very, very big increase,” Dr Lowe said.

“It would not surprise me and this is not a forecast but it would not surprise me if prices came down by 10 per cent. And even if they did that they’re still up 15 per cent over three years.”

Dr Lowe said the amount of homebuyers who took out fixed-rate loans soared to nearly 50 per cent after the RBA set the cash rate at a historic low of 0.1 per cent in November 2020.

The official interest rate, which guides mortgage and other loan rates set by lenders, remained at 0.1 per cent until May this year.

“People did respond sensibly in taking out fixed rate loans during that period. So they were prepared to go and buy a property or undertake other investments because they could get fixed rate money for three years,” Dr Lowe said.

“Our underlying message was the Reserve Bank would be standing with the community to do what was necessary to support the economy. We thought that when interest rates were going to stay low for a long period of time.”

RBA ‘NOT TO BLAME’ FOR HOUSING UNAFFORDABILITY

Dr Lowe has said the Reserve Bank’s interest rate decisions are not to blame for housing unaffordability in Australia.

He said “it’s the choices we’ve made as a society that have given us high housing prices” rather than interest rates “over a long period of time”.

“And the high housing prices come not from the high cost of construction, they come from the high cost of land embedded in each of our dwellings,” he said.

“And why do we have a high cost of land? Because of the choices we have made about taxation, the choices we’ve made about zoning and urban design.

“The fact that most of us have chosen to live in fantastic cities on the coast. And that we want a block of land. We don’t want to live in high density, and we’ve chosen as a society to underinvest in transport.

“So all of those things have either reduced the supply of well located land, and so we have high land prices embedded which gives us high housing prices. Interest rates have influenced the cycle, but not structurally.”

He said the central bank “can’t do anything about” these factors.

He said, speaking as an individual and “not a central bank governor”, he thought it would “be better if we had made different choices” to make houses cheaper and more readily available.

Dr Lowe says the RBA’s interest rate decisions are ‘not to blame’ for inflated house prices in Australia. Picture: NCA NewsWire / Dylan Coker

‘NOT MUCH OF A LINK BETWEEN RATES AND RENTS’

Dr Lowe says the Reserve Bank’s consecutive cash rate lifts didn’t “have much of a link” with how much Australians are paying in rent.

“Many rental contracts are one year and so the flow through is slow. Many, many landlords don’t put up their rentals just because interest rates are going up,” he said.

Dr Lowe said some landlords had been saying higher interest rates were going to force them to increase rents to meet their mortgage repayments.

“I know interest rates get blamed for lots of things, but I don’t think we should be blamed for higher rents,” he said.

“If they’re related, it’s only very marginal. Rents are rising quickly, not because interest rates are going up but the rental market is tight.”

‘TWO REASONS’ INFLATION IS HIGH

Dr Lowe said inflation was high for two reasons.

“One is the global story and we can’t do anything about that, but the other reason … is the domestic situation,” he said.

Dr Lowe said “domestic demand” was incredibly strong and the economy was having trouble meeting it.

“That’s the reality we face. Businesses (can’t) meet the demand. The economy is very, very strong, and when demand is strong, relative to supply, prices go up.”

LOWE DIDN'T KNOW ABOUT MORRISON’S SECRET PORTFOLIOS

Dr Lowe has said he didn’t know he was meeting with “two treasurers” when he met with Scott Morrison and Josh Frydenberg on two occasions.

The committee noted Dr Lowe had met with the former prime minister and former treasurer on July 19 2021 and January 27 2022.

It came to light last month Mr Morrison had secretly appointed himself to five additional ministerial portfolios during the pandemic.

Mr Morrison’s power grab was done without the knowledge of most of those ministers, including Mr Frydenberg.

Mr Frydenberg was reportedly blindsided by the news Mr Morrison had given himself dual control of the Treasury Department in May 2021.

Dr Lowe was asked at the hearing on Friday whether it had been reported to him that the RBA had “two treasurers” until this year’s federal election.

“No, it was not. I was as surprised as the rest of the community,” he replied.

‘UNEXPECTED THINGS DO HAPPEN’

Dr Lowe has said he doesn’t expect inflation and related interest rate rises to remain as high as they are now in 2023, but he noted anything was possible.

He said he had heard “quite a lot of concern about the global economy” during his trip last week to Basel in Switzerland where he met with other central bank governors from around the world.

“So the supply sides fixing up, commodity prices are starting to come down. We’re raising interest rates and the global economy is looking a bit fragile,” he said.

“So those things will, I hope and expect, bring inflation down.”

However, he said “if that’s all wrong” and inflation stays high at around 6 or 7 per cent again in 2023, then “interest rates are going to have to be higher”.

“I don’t expect that to happen but unexpected things do happen,” he said.

Dr Lowe says he expects inflation to cool down significantly next year but anything could happen. Picture: Louie Douvis / Getty Images

RESERVE BANK CONCERNED ABOUT GLOBAL SLOWDOWN

Dr Lowe said the Reserve Bank was worried about the potential for a global economic slowdown and the ramifications this could have on Australia.

“One important source of uncertainty is the global economy, where the outlook has deteriorated. The situation in Europe is very troubling, not least because of the extraordinary increases in energy prices,” he said.

“In the United States, the Federal Reserve has indicated that monetary policy will need to become restrictive to lower inflation. The Chinese economy is also facing major challenges due to the combination of Covid, a severe drought and very weak conditions in the property sector.”

FURTHER INTEREST RATE HIKES CONFIRMED

Dr Lowe confirmed there would be further interest rate rises, but he said the size and pace of those increases were not set and would depend on broader economic conditions.

He said the central bank was “committed to returning inflation to the 2 to 3 per cent target range”.

Dr Lowe said the RBA would “do what is necessary to make sure that higher inflation does not become entrenched”.

However, he acknowledged the pressure interest rate rises were having on Australians.

“Higher interest rates are putting pressure on households, just at the time that higher petrol prices and grocery bills are squeezing budgets. So it is a difficult and a concerning time for some people,’’ he said.

“The alternative, though, of allowing higher inflation to become entrenched would be even more difficult and it would damage our economic prospects.”