RBA’s Philip Lowe says borrowers should prepare for cash rates to move higher

RBA Governor Philip Lowe says Australia’s economy is on track for lower rates of unemployment and stronger growth.

Reserve Bank Governor Philip Lowe. (AAP Image/Dan Peled)

Reserve Bank of Australia chief Philip Lowe said borrowers should “prepare for higher interest rates”, but he is willing to be patient in terms of the timing.

In response to a question at a business forum in Perth, Dr Lowe said its “more likely” that interest rates will “go up than down”.

His comments come as Australian cash rates remain at a record low of 1.5 per cent, although interest rates around the world are starting on a tightening cycle.

Dr Lowe said he noted that markets are pricing that interest rates will go up than down. “I’d agree with that. The second is that it’s some time before an interest rate rise will occur and I’d also agree with that.

“The market pricing moves around from day to day but those two points are right. More likely it will go up but it’s not for some time,” Dr Lowe said.

“People should prepare for higher interest rates. They’re rising globally and if things work out well here over time — I’m not saying when — we’d expect higher rates here. In my view that would be a positive development for the economy.”

He noted there are scenarios where interest rates would have to be cut but he hoped those scenarios don’t eventuate.

“People don’t like hearing this but we’d all be better off if the next interest rate move is up rather than down,” he said.

In an earlier speech, Dr Lowe said Australia’s economy is on track for lower rates of unemployment and stronger growth as it exits a period dominated by a mining investment boom and bust.

In a speech titled “The Next Chapter,” the RBA governor said the bank’s optimistic forecasts for both inflation and gross domestic product growth in 2018 look to be achievable.

“As things currently stand, we look to be on course to make further progress in reducing unemployment and moving towards the midpoint of the [2-3 per cent] medium-term inflation target,” Dr Lowe said.

Still, some caution will need to exhibited by the RBA as soaring household debt levels will require policy makers to act carefully, he said.

“Higher levels of debt also mean that household spending could be quite sensitive to increases in interest rates, something the Reserve Bank will be paying close attention to,” he said. He added that households had been coping reasonably well with higher debt levels so far.

With GDP expected to grow 3.0 per cent on year in 2018, unemployment should fall and wages should rise faster, he added.

Australia’s job market has been a bright spot for the economy with more than 250,000 jobs created in the last six months, three quarters of them full-time positions. The jobs growth is occurring across the country, the RBA said.

The bank said Tuesday in minutes of its Sept. 5 policy meeting that the breadth of the jobs growth is a sign that the economy has moved beyond any distortions caused by swings in the mining sector.

“We expect to see a gradual decline in the unemployment rate. This should lead to some pick-up in wage growth, although we expect this to be a gradual process,” Dr Lowe added.

The governor also noted rising business investment and the return of “animal spirits” after a long absence, with conditions for business at decade highs.

-with Dow Jones Newswires