RBA rate hike: Philip Lowe isn’t going down without a fight
It’s a case of careful what you wish for after a landmark RBA review pushed the central bank move faster on its inflation fight.
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As the pressure builds on Philip Lowe, the Reserve Bank boss isn’t going down without a fight and responded by taking another mighty swing at the economy to curb inflation.
Just as most economists and markets were betting Australia’s rate cycle had peaked, Lowe has shifted gears by lifting the cash rate by 25 basis points and retaining a bias to hike rates further.
It represents the RBA’s governor’s parting swipe after the Albanese government’s landmark review last month called for overhaul to the central bank’s board and the way it operates.
The review also demanded more urgency in getting inflation to the midpoint of the RBA’s preferred 2-3 per cent target range. And so the RBA has responded with a surprise hike and a sharper focus on “a reasonable time frame” for bringing inflation under control. Previously the emphasis was Lowe was prepared to give weight to keeping the economy on an even keel.
The hike also comes with Lowe’s current term set to expire in September, amid doubts over whether Treasurer Jim Chalmers will give him another seven years in the role.
Lowe’s hike has threatened to overshadow Chalmers’ big budget next week, and this shows that after a bruising year the central bank governor wants to finish the job. And for Chalmers, who rushed to embrace the recommendations of the RBA review, it could be a case of be careful of what you wish for.
The RBA and its board are focused on today, and the shifting rhetoric suggests they are worried about high inflation becoming entrenched through the economy. Indeed, the jobs market remains tight and there are signs that house prices are starting to strengthen again in east coast capitals.
This means the RBA board and Lowe are betting the economy has the capacity to absorb further rate rises and still deliver a soft landing. To be sure, it’s a high stakes bet and the margin of error remains ever so fine.
Meanwhile the Bank revised down its growth forecast to 1.25 per cent this year from 1.5 per cent previously. It expects growth to recover slightly faster-than-expected to 2 per cent through to mid-2025.
Inflation however is likely to remain sticky, only coming down to the top end of its 2 per cent to 3 per cent target in 2025.
The latest CPI figures, released by the ABS last week, show that while inflation is cooling, it's not moving fast enough. Headline inflation was 7 per cent in the March quarter, down from 7.8 per cent in the three months to end-December. Even so Lowe noted on Tuesday inflation had “passed its peak, but at 7 per cent is still too high.”
In a speech in Perth late on Tuesday night Lowe pointed out while there was confirmation that the peak in inflation in Australia was now behind us, it “has not changed our view that it will be some time yet before inflation is back in the target range”.
“Goods price inflation is slowing, which is good news. But services and energy price inflation is still high and likely to remain so for some time,” he said in the speech.
Australia’s central bank is not alone in stepping up the battle against inflation. It follows a bigger than expected hike from New Zealand’s central bank last month and the powerful US Federal Reserve Bank ramping up rhetoric. There has also been a surprise hike in recent weeks from the European Central Bank, even as it was grappling with fallout from Credit Suisse.
The latest decision comes after Lowe met with his banking counterparts in Washington three weeks ago as part of the G20 finance ministers and central bank governors meeting. There the case was spelt out about how global inflation is not yet under control.
Now the market will reconsider where Australia’s interest rates are likely to settle.
Rather than a pause, Lowe has opened the door to more hikes, saying on Tuesday that “some further tightening” of monetary policy may be required “to ensure that inflation returns to target in a reasonable time frame”. However, this will depend upon how the economy and inflation evolve.
Speaking before the rate hike on Tuesday, the chief executive of Macquarie Group Shemara Wikramanayake noted that central banks around the world were worried about inflation becoming entrenched.
“It certainly looks like we’re globally in a situation where the central banks need to keep responding to rein in inflation,” she said. “In Australia as well, if inflation persists, then we are going to have to take action to slow the economy.”
johnstone@theaustralian.com.au
Originally published as RBA rate hike: Philip Lowe isn’t going down without a fight
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