The Reserve Bank believes a pause to its 10 consecutive interest rate increases will hinge on the strength of the jobs market over coming months while warning home buyers a record share of their after-tax income will be needed to pay down their mortgages.
A day after the RBA lifted official interest rates for a record 10th consecutive time, to an 11-year high of 3.6 per cent, bank governor Philip Lowe used a speech in Sydney on Wednesday morning to argue more rate rises were still on the horizon.
Lowe told the Business Summit the bank was watching the flow of economic data very closely while also being aware of the growing pressure on households struggling under the weight of high inflation and increasing interest rates.
He said the bank had the flexibility to respond to changes in the economic outlook, and that included taking a decision to pause at some point in the future.
“Our judgment, though, remains that further tightening of monetary policy is likely to be required to bring inflation back to target within a reasonable timeframe,” he said.
“Inflation is still too high and while it looks to be on a declining path it is likely to remain higher than target for a few years. If we don’t get inflation down fairly soon, the end result will be even higher interest rates and more unemployment.
“With monetary policy now in restrictive territory, we are closer to the point where it will be appropriate to pause interest rate increases to allow more time to assess the state of the economy. At what point it will be appropriate to pause will be determined by the data and our assessment of the outlook.”
Treasurer Jim Chalmers said on Wednesday morning the government was hopeful inflation was starting to come under control.
“We think inflation has peaked, there are encouraging signs … but we think it has, and inflation will moderate over the course of the next 12 to 18 months,” Chalmers told RN Breakfast.
Lowe said by the time the RBA board next meets in April, it will have updated figures on the jobs market and inflation. Those will be vital to the bank’s next actions.
“They are important pieces of data that we can look at before the next board meeting. If they suggest the right thing to pause we will do that, but if they suggest we need to keep going, we will do that,” he said.
Lowe revealed the lift in interest rates is grabbing a huge share of take-home pay for many Australians.
He said based on the past 10 interest rate rises, mortgage repayments are likely to reach a record 9.5 per cent of household disposal income later this year.
Combined with the fall in house prices across the country, the RBA would look closely at trends in household spending at each of its monthly meetings.
A key concern of the bank has been a prices-wages spiral pushing up inflation to even higher levels.
Lowe said recent figures, including the wage price index and income data contained within the national accounts, both suggested the risk of a wage spiral was abating.
“These data suggest that the risk of a prices-wages spiral remains low. This is helpful as we navigate that narrow path and it means that Australia is in a better position than some other countries,” he said.
“Notwithstanding this, we remain alert to the risks here given the combination of a tight labour market, the high level of capacity utilisation and the run of high inflation numbers.
“If this risk did materialise, the costs would be very high. In particular, if prices and wages were to chase one another, the end result would be persistently high inflation, even higher interest rates and higher unemployment. It is in our collective interest to avoid this.”
Lowe has agreed to meet representatives from Suicide Prevention Australia after the organisation warned of growing financial and mental health pressure on many people.
He said during yesterday’s board meeting, he went through some of the mail he had received from people outlining the difficulties they were facing because of big increases in mortgage repayments.
“People write to me about how it’s affecting their families and mental health,” he said.
“In the next month I’m meeting with Suicide Prevention and Lifeline, so we’re very alert to that. It weighs heavily on my heart (and) the hearts of the board members.
“But, at the same time, we know if we don’t get on top of inflation, higher interest rates, more unemployment, more pain.
“If we don’t get inflation down, we’ll be in all sorts of trouble. So that’s – it’s a difficult message at an individual level, and, it weighs on us a lot. I read the many letters, and often I respond to them.”
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