Households and businesses confronting mammoth mortgage repayments, soaring grocery bills and record energy prices will find cold comfort in the RBA decision to pause rate hikes.
After 10 consecutive rate increases to combat persistent inflation, the RBA remains public enemy No.1 in the suburbs where mortgage stress is peaking as more than 800,000 Australians fall off fixed loan contracts.
RBA governor Philip Lowe – who likely has five months left in the job – on Tuesday warned that “further tightening of monetary policy may well be needed to ensure that inflation returns to target”.
Ahead of a National Press Club address in Sydney to explain the RBA’s thinking on monetary policy, demand and supply, Dr Lowe said holding the cash rate at 3.6 per cent doesn’t rule-out more hikes in coming months. “In assessing when and how much further interest rates need to increase, the board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market,” Lowe said.
“The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”
While there has been some slowing in the Australian economy, high global inflation overshadows near-term optimism that the upwards rate cycle is over.
Five weeks out from Jim Chalmers’ second budget, which faces enormous structural spending pressures and restrictions on cost-of-living support payments, the RBA board and the government are right in wanting to drive down inflation.
The central bank, which believes inflation hit a peak of 8.4 per cent in December, acknowledges that while some households have savings buffers, others are “experiencing a painful squeeze on their finances”.
Further slowing in economic growth and higher unemployment towards the end of the year will put rate cuts back on the cards. However, economists predict mortgage-holders will have to wait until February next year.
ACTU president Michele O’Neil scolded the central bank, which said it was on alert to the risk of a prices-wages spiral, for “punishing working people … for a problem not of their making”: “They are struggling with low wage growth and high prices for essential items. Real wages are going backwards, mortgages and rents are skyrocketing, and people’s savings have been drained.”
Peter Dutton’s disastrous by-election defeat in Aston, a traditionally safe mortgage-belt electorate where the Liberal Party campaigned hard on the cost of living, will test the Coalition’s short-term resolve in hammering Labor over the economy.
Both Labor and the Coalition understand the perils of not containing inflation, which Lowe said “makes life difficult for people and damages the functioning of the economy”. “If high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later.”
The road to returning inflation to between 2 and 3 per cent – without causing perverse economic outcomes – will be a bumpy and unpredictable ride.
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