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| RBA rate rises and cash hoarders: six things we learned from Philip Lowe’s press club address | RBA rate rises and cash hoarders: six things we learned from Philip Lowe’s press club address |
| (7 days later) | |
| Reserve Bank governor says with high rents and energy costs feeding inflation, interest rate rises may be necessary even if it leads to household stress | Reserve Bank governor says with high rents and energy costs feeding inflation, interest rate rises may be necessary even if it leads to household stress |
| The Reserve Bank governor, Philip Lowe, has described any talk of rate cuts as premature following this week’s decision to pause the cash rate at 3.6%, ending a record run of 10 consecutive hikes. | The Reserve Bank governor, Philip Lowe, has described any talk of rate cuts as premature following this week’s decision to pause the cash rate at 3.6%, ending a record run of 10 consecutive hikes. |
| Lowe said on Wednesday that high rents and energy costs were feeding inflation, which meant further rate increases might be necessary even if that caused households stress. | Lowe said on Wednesday that high rents and energy costs were feeding inflation, which meant further rate increases might be necessary even if that caused households stress. |
| These are six takeaways from his address to the National Press Club in Sydney. | These are six takeaways from his address to the National Press Club in Sydney. |
| 1. The next rate move is likely upwards | 1. The next rate move is likely upwards |
| Lowe warned that borrowing rates will probably need to increase further to combat inflation. Even if the central bank were to pause rates again next month, he said it would not necessarily signal a peak. | Lowe warned that borrowing rates will probably need to increase further to combat inflation. Even if the central bank were to pause rates again next month, he said it would not necessarily signal a peak. |
| The RBA governor said any talk of cuts to the cash rate was hasty given the country is grappling with “the highest inflation rate in 30 years”. | The RBA governor said any talk of cuts to the cash rate was hasty given the country is grappling with “the highest inflation rate in 30 years”. |
| “I think it’s too early, way too early, to be talking about interest rate cuts and the balance of risk lies with further rate rises – but it will depend on the data,” Lowe said. | “I think it’s too early, way too early, to be talking about interest rate cuts and the balance of risk lies with further rate rises – but it will depend on the data,” Lowe said. |
| The decision to pause this week came amid growing concerns for the global banking sector, and some signs of easing inflationary pressures. | The decision to pause this week came amid growing concerns for the global banking sector, and some signs of easing inflationary pressures. |
| Australia’s annual inflation rate fell to 6.8% in February, down from December’s peak of 8.4%, but there has been no relief for rental prices and some utility costs, such as electricity. | Australia’s annual inflation rate fell to 6.8% in February, down from December’s peak of 8.4%, but there has been no relief for rental prices and some utility costs, such as electricity. |
| These inputs are helping keep inflation well above the RBA’s 2% to 3% inflation target. | These inputs are helping keep inflation well above the RBA’s 2% to 3% inflation target. |
| 2. Rental pressures will persist | 2. Rental pressures will persist |
| Lowe said pressure on renters is particularly strong, as housing supply fails to keep pace with strong population growth that picked up sharply after borders reopened. | Lowe said pressure on renters is particularly strong, as housing supply fails to keep pace with strong population growth that picked up sharply after borders reopened. |
| The average number of people living in each household has also been falling, putting strain on housing, as people set up work spaces at home amid more flexible arrangements with their employers. | The average number of people living in each household has also been falling, putting strain on housing, as people set up work spaces at home amid more flexible arrangements with their employers. |
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| “In the previous episode of strong population growth during the resources boom, it took nearly five years for housing supply to respond,” Lowe said. | “In the previous episode of strong population growth during the resources boom, it took nearly five years for housing supply to respond,” Lowe said. |
| He said rent inflation would be “quite high for a while yet”. | He said rent inflation would be “quite high for a while yet”. |
| Lowe believes some renters will change their living arrangements to ease the burden, resulting in more people living under the one roof, although he said that would not do enough to immediately rebalance the overall supply and demand equation. | Lowe believes some renters will change their living arrangements to ease the burden, resulting in more people living under the one roof, although he said that would not do enough to immediately rebalance the overall supply and demand equation. |
| 3. Mortgage holders are holding up | 3. Mortgage holders are holding up |
| While the official cash rate has been much higher in the past, the speed of the rate hiking cycle has put many households into difficult positions given they are also grappling with inflation-fuelled high costs for necessary items like food and energy. | While the official cash rate has been much higher in the past, the speed of the rate hiking cycle has put many households into difficult positions given they are also grappling with inflation-fuelled high costs for necessary items like food and energy. |
| There are growing concerns for the cohort of homeowners who bought during the pandemic when rates were at historic lows, given their ability to make much higher repayments hasn’t been tested. | There are growing concerns for the cohort of homeowners who bought during the pandemic when rates were at historic lows, given their ability to make much higher repayments hasn’t been tested. |
| Lowe said that, overall, mortgaged households were dealing well with the situation. | Lowe said that, overall, mortgaged households were dealing well with the situation. |
| “Rental stress is at least as big an issue at the moment as mortgage stress,” he said. | “Rental stress is at least as big an issue at the moment as mortgage stress,” he said. |
| He said he didn’t like the phrase “mortgage cliff”, which refers to borrowers coming off low fixed lending rates on to much higher variable mortgages. | He said he didn’t like the phrase “mortgage cliff”, which refers to borrowers coming off low fixed lending rates on to much higher variable mortgages. |
| “It’s not a cliff, it’s kind of a ramp up,” he said, noting that some households used the previous low-rate period to pay down debt. | “It’s not a cliff, it’s kind of a ramp up,” he said, noting that some households used the previous low-rate period to pay down debt. |
| There are about 880,000 fixed-loan facilities switching to higher-rate variable loans this year. | There are about 880,000 fixed-loan facilities switching to higher-rate variable loans this year. |
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| 4. Stories of hardship won’t dissuade further hikes | 4. Stories of hardship won’t dissuade further hikes |
| The RBA receives feedback from the community on hardship caused by rate hikes, but it won’t be put off its agenda. | The RBA receives feedback from the community on hardship caused by rate hikes, but it won’t be put off its agenda. |
| Lowe said he reads letters of hardship with a “heavy heart”. | Lowe said he reads letters of hardship with a “heavy heart”. |
| “But when I read them, I think, ‘What is the alternative?’” he said. | “But when I read them, I think, ‘What is the alternative?’” he said. |
| “If we didn’t put up interest rates, what’s going to happen? Inflation will stay high, interest rates will have to go higher later on and there’ll be more unemployment.” | “If we didn’t put up interest rates, what’s going to happen? Inflation will stay high, interest rates will have to go higher later on and there’ll be more unemployment.” |
| One alternative to raising rates is for governments to impose more taxes to stifle demand, a measure that Lowe conceded would not be welcomed by the community. | One alternative to raising rates is for governments to impose more taxes to stifle demand, a measure that Lowe conceded would not be welcomed by the community. |
| “Raising interest rates is very unpopular, as I know, but it’s our job and we do it,” he said. “It’s harder for the political class to do that.” | “Raising interest rates is very unpopular, as I know, but it’s our job and we do it,” he said. “It’s harder for the political class to do that.” |
| 5. Lowe is still wary of spiralling wage growth | 5. Lowe is still wary of spiralling wage growth |
| The RBA governor noted that there was no evidence of excessive wages growth, which had been raised as a potential fuel for further inflation. | The RBA governor noted that there was no evidence of excessive wages growth, which had been raised as a potential fuel for further inflation. |
| Lowe said a sustainable rate of wages growth was 2.5% plus prevailing rates of productivity growth. | Lowe said a sustainable rate of wages growth was 2.5% plus prevailing rates of productivity growth. |
| “It’s really important that we don’t develop a pattern here of wages and price chasing one another,” he said. | “It’s really important that we don’t develop a pattern here of wages and price chasing one another,” he said. |
| “If they do, then inflation will get entrenched and we’ll have to have higher interest rates.” | “If they do, then inflation will get entrenched and we’ll have to have higher interest rates.” |
| There has been strong criticism over the regular warnings of a wages breakout that are often used during public sector pay negotiations. | There has been strong criticism over the regular warnings of a wages breakout that are often used during public sector pay negotiations. |
| 6. Australians are still hoarding cash | 6. Australians are still hoarding cash |
| It might be a residual habit from early pandemic fears, but Australians are still hoarding cash. | It might be a residual habit from early pandemic fears, but Australians are still hoarding cash. |
| While there should be 18 of Australia’s highest value note for every person in the country, the physical cash is not flowing around the economy. The RBA suspects that it is being held as a store of value. | While there should be 18 of Australia’s highest value note for every person in the country, the physical cash is not flowing around the economy. The RBA suspects that it is being held as a store of value. |
| “I don’t have my share,” Lowe said. “I don’t know many people who do, so it’s hard to know where they all are.” | “I don’t have my share,” Lowe said. “I don’t know many people who do, so it’s hard to know where they all are.” |
| He said that given interest rates had been rising, people could earn interest in their bank accounts. | He said that given interest rates had been rising, people could earn interest in their bank accounts. |
| “The incentive of holding $100 bills under your bed is less.” | “The incentive of holding $100 bills under your bed is less.” |