Former RBA governor Glenn Stevens says elevated rates to stay

Former Reserve Bank governor Glenn Stevens says there’s little chance of a return to the ultra-low rates era.

Glenn Stevens at the APPEA conference in Adelaide. Picture: Naomi Jellicoe

Former Reserve Bank governor Glenn Stevens has warned a period of elevated interest rates is likely to persist as central banks around the world continue to tackle a ‘once in a generation’ inflation crisis.

Speaking at the APPEA oil and gas conference in Adelaide on Tuesday, Mr Stevens said further interest rate hikes are likely in the short term, and will remain higher than pre-Covid-19 levels as global economies continue to recover from the economic shock of the pandemic.

“Inflation is still way too high, so it’s not surprising that central banks have continued to push rates higher over recent months, and have signalled a willingness to go higher still,” he said.

“And really, it can’t be otherwise at this stage.

“Central banks are in a once-in-a-generation battle to return inflation to the very low and stable levels that it was at, and was such a strong foundation of the preceding several decades of prosperity.

“I think we’ve also transitioned from a world in which interest rates were low for a long time to one in which they’ll be elevated for some time.

“Not necessarily that much higher than now, but I think a return to the ultra-low rates that we saw for a long time is unlikely.”

Mr Stevens said that while fiscal stimulus measures injected into global economies during Covid-19 were needed, questions remained about whether most governments went too far.

“The direction and the timeliness of those responses I don’t think can really be faulted given the circumstances that policymakers faced,” he said.

“I think the question is more one of size. Such was the atmosphere and sense of emergency that all the normal restraints really went out the window in a number of countries, including this one.

“The size of budgetary injections over a year, or 18 months, was bigger than anything we’ve ever seen before outside of world wars.

“In hindsight it’s surely clear that the extent of fiscal stimulus in many instances was too great and we shouldn’t be surprised, in hindsight, that inflation in most countries has reached its highest level for three or four decades.”

Mr Stevens comments came as the latest Reserve Bank board minutes revealed “further increases in interest rates may still be required” to bring inflation back under control.

The RBA on May 2 surprised investors and most economists by lifting its cash rate target from 3.6 per cent to 3.85 per cent.

The minutes from that board meeting, released on Tuesday, showed members debated the cases for a pause versus a hike, including “multiple arguments” in favour of an 11th increase in 13 months.

The minutes reiterated the board’s “determination to do what is required to bring inflation back to target, while emphasising that it is still seeking to traverse the narrow path”.

NAB this week predicted a further rate rise to 4.1 per cent in July or August, with the potential for a further hike to 4.35 per cent this year.

CBA said another rate increase would require the economic data, particularly around inflation, GDP, the unemployment rate and wages/unit labour costs, to come in stronger than the RBA’s updated forecasts.

“We do not think the RBA will lift the cash rate again if the economic data prints in line or weaker than their forecasts,” said CBA’s head of Australian economics, Gareth Aird.

RateCity says a cash rate of 4.35 per cent would mean a borrower with a typical 25-year mortgage of $500,000 would be paying $1211 a month more than they were in May 2022, while a $750,000 mortgage would cost an extra $1816 monthly.

RateCity research director Sally Tindall said economists’ current forecasts varied, and “not even the RBA knows how high the cash rate will have to go in order to tame inflation”.

“Plan for at least one more hike, if not two, just to be prepared,” she said.

“It’s best to be over prepared when it comes to the mortgage, rather than fall short.”

Borrowers were yet to feel the impact of the May rise, and those under pressure should “start making cutbacks now”, Ms Tindall said.