Philip Lowe takes stock but household pain keeps rolling on

RBA governor Philip Lowe says a decline in housing prices is leading to a substantial slowing in household spending

For most of the past year, the Reserve Bank has been flying blind in its fight against rampant inflation.

The safe course was to stick to aggressive monetary tightening, squeezing cashed-up shoppers, and giving the impression to all concerned the central bank was serious in returning inflation to its mandated target range of 2 to 3 per cent.

But Russia’s war on Ukraine, financial market volatility, a world awash in cheap money and disrupted supply chains, and the habits of recently liberated consumers meant the RBA was operating amid a fog of uncertainty.

Then there are overseas bank failures and policy lags that beset this crude monetary implement, delays that make central banking a wobbly activity at the best of times.

Lowe had to start the battle from a near-zero cash rate during a federal election.

The classic approach, as Westpac’s Bill Evans put it, was to keep raising rates swiftly until they were in the “contractionary zone”, and then take stock.

Inflation hit a three-decade high, while home borrowers begged officials to ease the agony. Now after an unprecedented 10 straight hikes and a cumulative 3.5 percentage-point rise in the cash rate, the RBA has found clear air and thinking time.

From this vantage, the central bank board will assess the damage the economy has suffered and how quickly inflation is trending down after its peak late last year.

Whether the RBA has pre-loaded too much punishment will become apparent over the second half of this year, as those borrowers on ultra-cheap fixed deals see their repayments balloon by 50 per cent or more when their loans roll over, and the jobless rate rises.

As central bank governor Philip Lowe acknowledges in his statement on Tuesday, avoiding a “hard landing” of rapidly rising unemployment and business failures will be a close-run thing.

But with the clock ticking on his tenure, Lowe won’t want a stop-start, helter skelter rate policy if inflation were to reappear and the war is lost.

“High inflation makes life difficult for people and damages … the economy,” Lowe said.

“And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment.”

That, at least, is crystal clear.

So just to be safe, Lowe and Co are likely to launch one more strike against a persistent foe that is likely to remain at large for years, given our woeful productivity, inherited loose fiscal discipline, lack of market competition and a migration surprise that will keep demand ticking stronger for longer.