Reserve Bank governor Philip Lowe dropped two critical words from his usually grim monthly statement that should finally give borrowers hope Australia’s wave of brutal rate hikes is very near the end.
The words: “further increases” (plural) in interest rates were needed that appeared last month were missing. This marks a significant shift in rhetoric from a central bank that has warned it would do whatever it takes in coming months to get inflation back under control.
In their place, Lowe said “further tightening” was needed as he subtly suggested that less brute force will be applied from here on in. Indeed he has even dangled the prospect of a much welcome rate pause in April.
“The (RBA) expects that further tightening of monetary policy will be needed to ensure that inflation returns to target and that this period of high inflation is only temporary,” Lowe said following Tuesday’s 25 basis point cash rate hike.
There was also an important rider to his message. In assessing “when and how much” further interest rates need to increase, the RBA board will be keeping a close eye on household spending and labour market, Lowe added.
Even if there is a pause in April, households and battered businesses shouldn’t get out and start celebrating just yet. There will be more rate rises to come – potentially one or two – but we are getting close to the peak and this should see the cash rate top out at between 3.85 per cent to 4.1 per cent by the middle of the year.
As Nomura economist Andrew Ticehurst noted: “We are left with the clearer impression that the board simply does not know how much further the cash rate will need to rise, and when”.
After a month of playing the tough guy, Lowe’s dovish instincts have kicked in and he wants the rates pain to end as much as anyone.
It is clear that nearly a year of rapid rate hikes including several super-sized hike are starting to slow the economy and latest move, taking the cash rate to a 12-year high of 3.6 per cent will only add to the headwinds.
Indeed it was consumer spending that took one of the biggest hits in the December quarter national accounts and retailers from JB Hi-Fi to Harvey Norman have signalled a slowing in sales from recent peaks. On this week bank bosses from ANZ’s Shayne Elliott, Westpac’s Peter King and on Tuesday Commonwealth Bank’s Matt Comyn have each acknowledged that rate rises were slowing the economy and households were starting to adjust. Although Comyn said business confidence is holding up relative to consumer confidence.
Lowe’s position has shifted from the start of February when the RBA came out of the blocks with plenty of tough talk about future rate rises (more than one), which at the time forcing many economists to lift their forecasts for peak rates.
And while there has been a month of political sniping at Lowe as well as some paparazzi stalking, the governor clearly thinks the economy has finally shifted down several gears with a string of hard data showing the slowdown is on. He also acknowledges like a freight train laden with iron ore, the lag effects of cash rate hikes means the economy needs plenty of distance to slow where he needs it.
Annual headline inflation dropped from 8.4 per cent to 7.4 per cent in January, according to the monthly series. But it is still too high and the RBA is worried it could become entrenched.
On other positive signs, while household savings are rapidly being eroded, the major banks are seeing virtually no mortgage stress. Indeed credit card balances are being paid down and there is no signs of a lift in cash advances on credit cards. A high rate of cash withdrawals are a reliable forward indicator of financial stress.
Business remains cautious, but like households they want to see an end of the rate cycle to give them certainty in planning. Business investment remains strong, although costs are rising through the lag effects of wage rises.
The key numbers that would add to a pause case will be delivered in coming weeks: monthly jobs data and retail trade. Any fall in employment numbers could tilt the scale towards a hold. Lowe is scheduled to deliver a speech at a business conference early Wednesday, which is expected to put some more colour around his softening stance.
Even at the current trajectory with no more rate hikes built in Australia’s growth is expected to grind to just 1 per cent by the second half of this calendar year. This leaves almost no room for error for Lowe with any miscalculations almost certainly to lead to the economy slipping into a recession. The RBA’s reputation is on the line. Lowe was late to the rate hike cycle compared to other major economies, which means inflation has been slower to fall away. Late last year he send signals that he was going soft on rates and then he doubled down on the tough talk in February after the RBA was spooked by fourth quarter inflation data. Indeed the minutes for February meeting show the RBA board didn’t even factor a case for a hold and raised the possibility of another 50 basis point hike. (It ultimately went 25 basis points).
In better news inflation appears to have finally peaked through the economy and a further easing in consumer prices is expected in coming months as the economy slows.
Lowe knows this is a big risk to his changing of the tone. If inflation catches on again in the economy the reputation of the central bank will be severely damaged. Particularly as Lowe’s own position is up for renewal from Treasurer Jim Chalmers later this year. There is a growing expectation that Lowe will decide not to stand for another term of up to seven years.
High-profile Westpac economist Bill Evans warned this week, failure to get inflation under control now will most certainly lead to higher interest rates down the track – no matter who will running the RBA at the time – and this will mean significantly more pain on housing and unemployment and the economy.
johnstone@theaustralian.com.au
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