RBA rate rise next week on the table after shock rise in inflation

Reserve Bank governor Philip Lowe pledged to regain control of runaway price rises that were ‘hurting every single Australian family’.

With few expecting his seven-year term to be extended beyond September, RBA Governor Philip Lowe appeared at what could be his final appearance in front of Senate estimates as the country’s top central banker. Picture: NCA NewsWire / Martin Ollman

Mortgage holders could be hit with another rate rise as soon as next week, after inflation accelerated in April and Reserve Bank governor Philip Lowe pledged to regain control of runaway price rises that were “hurting every ­single Australian family”.

Ahead of a Fair Work Commission decision on Friday that could boost minimum pay rates by as much as 7 per cent, Dr Lowe warned of “upside risks” to consumer price growth and said wages growing at their current pace would not be consistent with meeting the inflation target without a revival of the nation’s flatlining productivity performance.

Investors on Wednesday dumped stock on fears sticky consumer price growth could demand a more aggressive response from the central bank, with the S & P/ASX 200 slumping by 1.6 per cent and to its worst day in three months.

As economists at Capital Economics and Goldman Sachs ­predicted a rate rise to 4.1 per cent at next Tuesday’s RBA board meeting, Dr Lowe recognised that the 11 rate hikes over the past year “are very unpopular and are hurting people”.

“Every single family is feeling those cost-of-living pressures. And that’s because the price level over the past year went up 7 per cent,” he said, based on the March quarterly consumer price data.

“We’ve got to stop that. If we don’t, then people will still feel their family budgets under stress and the economy won’t work well,” he said.

The governor’s comments came as inflation broke its recent rapid decline to accelerate to 6.8 per cent in the year to April, from 6.3 per cent in March.

After peaking at 8.4 per cent in December on the monthly numbers, analysts had anticipated a small reversal in the year-on-year inflation figure, but the size of the increase took them off guard.

CANBERRA, AUSTRALIA, Newswire Photos. MAY 31, 2023: RBA Governor Philip Lowe appears at the Economics Legislation Committee Senate Estimates at Parliament House in Canberra. Picture: NCA NewsWire / Martin Ollman

EY chief economist Cherelle Murphy said the data showed ­“inflation is running too fast, ­despite wages so far remaining ­contained”.

While the monthly figures could be volatile, Ms Murphy said “this result will be disappointing for the Reserve Bank and strengthens the case for tighter monetary policy”.

Economists at Capital Economics and Goldman Sachs said the new monthly numbers would trigger the RBA to hike again at next Tuesday’s meeting, to 4.1 per cent, and pencilled in a further ­increase by July.

UBS chief economist George Tharenou said a rate rise at Tuesday’s board meeting was now a “live” possibility, especially with what he believed could be a hefty 7 per cent minimum wage rise ­decision on Friday.

Other economists, however, downplayed the significance of the shock monthly figures from the Australian Bureau of Statistics, noting that a 9.5 per cent annual jump in petrol prices due to the start of the fuel excise discount a year earlier had spurred inflation.

They noted the monthly ­increase in the consumer price index slowed to 0.3 per cent, from 0.5 per cent in March and 0.6 per cent in February.

In any case, the data showed cost-of-living pressures remained intense. Electricity prices were 15 per cent up on a year earlier, and groceries up 8 per cent.

Speaking at what could be his final senate estimates committee hearing before the expiry of his seven-year term in September, the RBA boss said he was not ­engaged in a “scare campaign” over inflation, and urged Australians to consider the alternative of even higher interest rates and more unemployment if cost-of-living pressures were not brought under control.

“We will do what’s necessary to make sure inflation comes back in the target range in the next few years,” he said.

The ABS data revealed more worrying signs for renters, with rents accelerating from 5.3 per cent in the year to March, to 6.1 per cent in April.

Dr Lowe in his testimony identified the rapid rise in rents as “a very significant issue”.

The bank expected rent rises to reach close to 10 per cent, he said, “and some people experiencing even higher rates than that”.

Dr Lowe said the “underlying issue” driving high housing costs was insufficient supply at a time of increasing demand, and that the pandemic trend towards larger homes and smaller households had contributed to the issue of low vacancy rates.

“The other thing that is now happening is a big increase in population, by 2 per cent this year. Are there 2 per cent more houses? No, the rate of addition to the housing stock is very low.”

The RBA boss said “nominal wage growth at the moment ... has not been the source of inflation”.

Dr Lowe said the 3.7 per cent increase in pay rates “historically … would have been a good number”. “The problem is weak productivity growth. Over the last three years there has been no ­increase in the average output produced per hour worked in Australia,” he said.

“What we have been hoping to achieve over time is an average inflation rate of 2.5 per cent, and the country would hopefully ­deliver 1 per cent productivity growth, and so wages growth of around 3.5 per cent ... was a reasonable benchmark,” he said.

But with zero productivity growth, Dr Lowe said the bank was focused on unit labour costs, which he said over time tended to coincide with overall inflation.

“Unit labour cost growth in Australia is quite high, because you’ve got wages growth at 3.75 per cent and no productivity growth,” he said.

“In other countries, wages growth is too strong. In Australia it isn’t, but productivity growth is weak. And if unit labour costs growth is 3.5-4 per cent, then it’s hard to have 2.5 per cent inflation.

“The best solution to this is a lift in productivity growth,” he said.

CEDA chief economist Cassandra Winzar said it would “take a concerted effort across all levels of government” to reverse the steady deterioration in the country’s productivity performance.

Ms Winzar said this slowdown was “a huge problem for future economic growth, and particularly for living standards”.

“This should be front of mind for all policy makers. It’s really crucial to further economic growth, and for that growth to happen in a way that’s not inflationary,” she said.

Ms Winzar said productivity should recover in the short term once the pandemic shock worked its way out of the system, but only to the weak and declining trend seen leading into the health crisis.

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