Early rate hike could threaten 4 per cent unemployment: RBA governor Philip Lowe

RBA’s governor tells parliamentary committee raising rates too early could threaten the chance of reaching a 50-year low in unemployment.

Governor of the Reserve Bank of Australia Philip Lowe. Picture: Lisa Maree Williams/Getty Images

Raising official interest rates prematurely could threaten the historic goal of a sub-4 per cent jobless rate this year, Reserve Bank governor Philip Lowe said on Friday.

As global inflationary pressures surge, particularly in the US, financial markets are factoring in several rate hikes, starting in ­August, as underlying inflation settles in the RBA’s 2 to 3 per cent target zone.

Dr Lowe told a parliamentary hearing that while interest rate hikes this year were plausible, the RBA would be patient and try to seize the prize of an unemployment rate not achieved in 50 years.

But he also warned there could be “abrupt changes in financial market conditions”, including in Australia, as supply-chain disruptions fuelled inflation and leading central banks sought to dampen those pressures.

“We have scope to wait and see how the data develops and how some of the uncertainties are ­resolved,” Dr Lowe told the House of Representatives economics committee in his twice-yearly ­appearance.

“Countries with higher inflation rates have less scope here. I recognise that there is a risk to waiting but there is also a risk to moving too early. Over the period ahead we have the opportunity to secure a lower rate of unemployment than was thought possible just a short while ago.

“Moving too early could put this at risk. At the same time, we are committed to maintaining low and stable inflation and will do what is necessary to achieve this important goal.”

The federal election is due by May, with the campaign likely to be fought on economic issues, such as cost of living, against a background of rapid employment growth and rising wages.

Dr Lowe said the strong labour market was due to extraordinary fiscal and monetary stimulus over the pandemic rather than the hothouse effect of border closures.

Asked about budget repair, he said the best way to pay down debt was by growing the economy and generating income, and the latter was “all about the productivity agenda”.

Dr Lowe said eventual rate rises will be in “an environment when the economy is doing well”, with some households having healthy repayment “buffers”, workers on a higher pay and more people in work.

He said the RBA would rely on actual data for consumer price and wages growth rather than forecasts.

Economists at major home lenders CBA and Westpac expect ­official interest rates to begin ­rising in August.

Given the high levels of household debt, CBA sees a cash rate peak in the current cycle of 1.25 per cent, while Westpac’s forecast is 1.75 per cent in March 2024.

Dr Lowe told the committee that the sharp rise in US inflation, which hit a 40-year high of 7.5 per cent last month, had come as a surprise and was a source of uncertainty.

He told the committee “it’s ­entirely possible that countries with higher inflation rates will need a bigger adjustment in interest rates than currently anticipated”. “And if so, this could result in abrupt changes in financial conditions around the world including here in Australia.”

Last week, the RBA kept the cash rate at 0.1 per cent and ­released upgraded forecasts for growth, inflation and employment. The central bank has not raised interest rates since 2010.

Dr Lowe told the committee it was too early to conclude “that ­inflation is sustainably in the ­target range”.

“In underlying terms, inflation has just reached the midpoint of the target band for the first time in over seven years,” he said.

“And this comes on the back of very large disruptions to supply chains and distribution networks, which are expected to be only temporary. It also comes at a time when aggregate wages growth is no higher than before the pandemic, which was associated with inflation being persistently below target”.