Lowe rebukes rent freeze quick fix as rates, unemployment may rise
The nation’s top central banker has rejected a Greens’ proposal to cap rent increases ahead of a crucial national cabinet meeting next week.
Freezing rents are a quick fix that would risk aggravating the country’s housing crisis, outgoing Reserve Bank governor Philip Lowe has warned.
The comments came as Dr Lowe faced his final parliamentary interrogation in front of the House economics committee on Friday, alongside incoming governor Michele Bullock, as Dr Lowe prepares to exit the bank in mid-September.
With national cabinet set to meet in Brisbane next Wednesday, the intervention comes as Anthony Albanese works to chorale state and territory leaders to support his plans to address sky-high rental and housing prices.
With rental prices surging more than 10 per cent a year, the Greens are demanding that the prime minister co-ordinate rental caps with the states and territories in return for their support for the government’s $10bn Housing Australia Future Fund.
Rent freezes not the answer
The governor weighed into the heated political dispute over Australia’s rental crisis, arguing that increased housing supply, not implementing rent caps, was the answer.
“The solution has to be putting in place a structure that makes the supply side of the housing market more flexible and that means zoning and planning deregulation and means go at the state and local governments being part of the solution,” Dr Lowe said when quizzed by committee chair Dr Daniel Mulino.
“There’s been strong demand for rental accommodation, and the rate of addition to the housing stock is low.”
“This year the population has increased by 2.5 per cent. The number of dwellings in the country has increased by 1.5 per cent. So there’s a big gap there.”
“In most cases, rent controls reduce incentives to add to supply,” he said.
Rates pain may not be over
In his opening statement, the RBA governor did not rule out further rate increases, stating that more rate hikes may still be necessary to tame rampant price pressures.
“Looking forward, it is possible that some further tightening of monetary policy will be required to ensure that inflation returns to target within a reasonable timeframe,” Dr Lowe said, warning of “uncertainties and risks” that the central bank was mindful of.
However, Dr Lowe said it was “encouraging” that recently released data was consistent with inflation returning to the 2-3 per cent target over the next couple of years.
“The data (is) also consistent with the Australian economy continuing to travel along that narrow path that I have spoken about for some time – that path is one that leads to inflation coming down within a reasonable timeframe and the unemployment rate remaining below the levels of the past 40 years.”
Unemployment set to jump by 140k
The Reserve Bank governor defended the bank’s view of a “modest” rise in unemployment as rate hikes put a handbrake on inflation and economic growth.
The central bank forecasts that inflation will tick up to 4.5 per cent by mid-2025, with an extra 140,000 people set to be looking for work.
But Dr Lowe also reminded the committee that people were broadly still getting the hours of work that they wanted.
“Youth unemployment is the lowest in decades, and female labour force participation has increased a lot … with an unemployment rate lower than any time that it‘s been in the last 40 years.”
According to the latest data from the Bureau of Statistics, there were currently 504,400 Australians looking for work in June. The unemployment rate currently sits at 3.5 per cent, a near record low.
Borrowers keeping up with repayments
Despite higher interest rates, Dr Lowe said borrowers rolling off fixed-rate loans did not appear to be struggling any more than other borrowers.
“What we know from the banks … is that when they transition, they haven’t fallen behind on housing loans in any greater way,” Dr Lowe said.
“So the performance is pretty much the same. And the banks have also provided us with some data that their spending on goods and services is pretty much the same [as other borrowers].”
Around one million borrowers have already transitioned from low fixed-rate loans to higher variable rates. A similar number of mortgagors are expected to transfer off fixed-rate loans in the next 18 months.
The governor claimed that borrowers transitioning off fixed-rate loans were pre-empting the change and had accordingly prepared for higher repayments on their loans.
“They knew their mortgage payments are going to go up a lot … And so when they actually make the transition, they’re better prepared.”
Banks not profiteering, Lowe says
Questioned over claims banks were profiteering from rate hikes, Dr Lowe noted regulatory rules required banks to hold a high level of capital.
The comments came after Australia’s largest retail bank, the Commonwealth Bank, posted a record cash profit of more than $10bn for financial year 2022-23, while repayments for borrowers on variable rates had jumped 10 times in the same period.
Dr Lowe said savers and borrowers “worried about this issue” should look for alternative saving and mortgage rates.
“If you don’t like the fact that banks are earning so much money, then I encourage you to shop around and make [the banks] work harder for your money.”
“If you're not getting a good enough deal, go to someone who’ll give you more,” he said.
Pandemic management Lowe’s biggest regret
Asked about his “biggest regret” during his seven-year tenure as Australia’s top central banker, Dr Lowe admitted that the RBA had overegged its response to the COVID-19 pandemic.
“We didn‘t fully understand the nature of the pandemic and how long it would last and what the implications would be on the economy,” he said.
“We responded with maximum insurance and it turned out that the scientists did a much better job than anyone thought … I wish in retrospect that we’ve been able to understand that in more detail, but if we’d had we would have.”
Dr Lowe had previously been criticised for providing guidance that the central bank wouldn’t raise the cash rate until 2024. He later publicly apologised for making this claim.
Economic outlook still challenging.
Dr Lowe also cautioned services inflation, a measure that more accurately reflects costs like power prices and wages, may stay high, thus prolonging high inflation.
“The longer inflation stays high, the greater the likelihood that businesses and workers will come to doubt that inflation will return to target and, in response, they will adjust their behaviour.
“This would make the task of controlling inflation more difficult and likely lead to a sharper slowing in output and a greater loss of jobs.
The Reserve Bank governor also issued a warning over Australia’s lagging productivity. Stronger wages growth would add to inflation if productivity growth did not increase to pre-pandemic levels, he said.
“If this pick-up in productivity does not occur, all else constant, high inflation is likely to persist, which would be problematic,” he said.
Lowe reveals next steps
When pressed on his future, Dr Lowe said he had no intention of staying in the public eye after he steps down as the bank’s head next month.
“My main objective is to see if I get my golf handicap to single digits,” Dr Lowe confessed.
“I don‘t plan to be a public commentator.”
Following frenzied speculation over Dr Lowe’s future leading the central bank, Treasurer Jim Chalmers announced in July that the central banker’s seven-year term as governor would not be extended.
Michele Bullock, who has spent her entire career at the RBA was appointed as Dr Lowe’s replacement. She will be the first female governor in the bank’s history.
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