Reserve Bank governor Philip Lowe has softened the blow from the 10th straight rate hike with a signal that we will get one more increase and then maybe – just maybe – a breather.
For the many indebted Australians who have suffered a $1000 increase to their interest bill since April, a pause sooner rather than later would be a welcome relief. For others, it could be the difference between scraping by, or not.
After a much hotter than anticipated December quarter inflation report, a spooked Lowe in February said “further increases in interest rates will be needed over the months ahead” to bring too-high inflation to heel.
This was an unambiguous sign of at least two more hikes, and a cash rate above 4 per cent was suddenly the consensus call.
The arrival of autumn has cooled Lowe’s fervour. That and some clear signs that the economy and inflation are slowing and that monetary policy is having its desired effect.
“The monthly CPI (consumer price index) indicator suggests that inflation has peaked in Australia,” Lowe says. “Growth has slowed” and the nation’s economic performance “over the next couple of years is expected to be below trend”.
What’s more: “Some households have substantial savings buffers, but others are experiencing a painful squeeze on their budgets due to higher interest rates and the increase in the cost of living.”
And so to Lowe’s new guidance. “The board expects further tightening of monetary policy will be needed to ensure inflation returns to target and that this period of high inflation is only temporary,” he says.
“Further tightening” is a much more ambiguous term than “further increases in the months ahead”.
If, at this stage, you think Lowe keeps sending mixed messages, well so is the economy.
The surveys suggest consumer confidence is in the doldrums, but we travelled, ate out and partied as if we didn’t have a care in the world through the summer holidays.
Lowe recognises that some households are suffering a “painful squeeze” on budgets as a result of soaring mortgage costs. The daily anecdotes of families struggling to pay bills and lengthening queues for charity services reflect not just higher mortgage costs but also soaring costs of living and fast-moving rents.
Meanwhile, Australia imported a record $3.9bn worth of cars in January, up 30 per cent on the month before. Businesses are reporting great operating conditions, and their investment plans remain strong.
Which brings us to the almost impossible job of the central bank trying to operate an economic brake that takes months to take full effect. “The board recognises that monetary policy operates with a lag and that the full effect of the cumulative increase in interest rates is yet to be felt in mortgage payments,” Lowe says.
“There is uncertainty around the timing and extent of the slowdown in household spending.”
All of which makes it hard for a central bank governor to offer consistent guidance to stressed mortgage holders wondering just how bad things are going to get.
The best advice? Hope for the best, brace for the worst.
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