According to RBA governor Philip Lowe, inflation must come down – no matter what

In a speech at the Morgan Stanley summit, Reserve Bank of Australia governor Philip Lowe explained the thought process behind this week’s unforeseeable hike to official interest rates. 

“Our job at the central bank is to make sure that this period of high inflation is only temporary. It is important that we are successful here,” explained Lowe. 

The RBA has come under heavy fire from angry home loan borrowers and renters copping the fallout from the rate hikes, given that no one expected them to go so high so fast. 

Many leading economists predicted the central bank would hold the cash rate at 3.85% pending new economic data, which would have relieved some of the mortgage stress. Yet the RBA moved anyway, reiterating that inflation must come down no matter what. 

“High inflation is corrosive and damages our economy,” said Lowe. “It erodes the value of money and savings, puts pressure on household budgets, makes it harder for businesses to plan and distorts investment. It makes us all poorer and hurts people on low incomes the most.”

However, Lowe acknowledged in his speech that the path to achieving lower inflation is a “narrow” one. Mistime a rate hike, and employment and house prices may sink. Get it wrong entirely, and the RBA may plunge the economy into a recession. 

But will property prices need to crash to stop inflation and halt rate hikes?

While Lowe’s speech unpacked lots of data and explained the RBA board’s decision-making process, his main point emphasised the need to combat inflation no matter what – including people’s expectations that inflation will stick. 

“If inflation stays high for too long, it will become ingrained in people’s expectations and high inflation will then be self-perpetuating,” explained Lowe. 

“As the historical experiences shows, the inevitable result of this would be even higher interest rates and, at some point, a larger increase in unemployment to get rid of the ingrained inflation. The Board’s priority is to do what it can to avoid this.”

In April, the RBA held the cash rate steady for the first time since it began raising rates in May 2022. This dovish pivot allowed the central bank to get a clearer picture of tight monetary policy affects the economy. 

However, the April hold may have sent the wrong signal to markets, which readily rebounded with spikes in consumer spending and property prices. Pundits celebrated and declared the rate cycle had peaked, but since April, the RBA has made two more 0.25% hikes – both of which caught markets entirely off guard. Could the April rate hold have set the wrong tone?

The RBA acknowledges that the worst inflation has passed. According to the Australian Bureau of Statistics, prices have dipped, spending has slowed, and GDP growth has damped. Employment remains high, but productivity stagnated since the pandemic, which mystified the governor somewhat. (Heard of pandemic fatigue, Lowe?)

In no uncertain terms, however, Lowe reminded us that inflation is the target. If employment and house prices suffer because of tight monetary policy, in the RBA’s view, it’s a “necessary” sacrifice.

“[The] desire to preserve the gains in the labour market does not mean that the Board will tolerate higher inflation persisting. There is a limit to how long inflation can stay above the target band,” explained Lowe.

For suffering households, however, this is not good news. Vulnerable Australians will be hit hardest, despite evidence from the OECD suggesting corporate profiteering made inflation worse – not ordinary households.

“I acknowledge that [changing the cash rate] comes with complications,” said Lowe. “Its effects are felt unevenly across the community [...] But this unevenness is not a reason to avoid using the tool that we have.”

“If we had not tightened monetary policy, the cost of living would be higher for longer [...] So, as difficult as it is, the rise in interest rates is necessary to bring inflation back to target in a reasonable timeframe.”

Refinancing remains a popular option for mortgage borrowers facing steep increases in their monthly repayments. However, it can be a complicated process requiring preparation since refinancers must qualify for the new home loan. 

This means credit checks, serviceability tests, and a detailed look at savings accounts – and rate hikes make ticking these boxes harder. Mortgagors unable to qualify may find themselves home loan hostages, which is a step before the worst-case scenario: mortgage prison. 

So if you aren’t sure whether you can absorb a few more rate hikes, act now, not later. Some strategies to boost your chances of successfully refinancing include: 

• Reduce your spending now, and monitor your household budget (maybe through the help of an award-winning budgeting app).
  
• Negotiate a lower interest rate with your lender: they’d rather play ball than lose your business entirely.
  
• Pay off your debts so you don’t look like a home loan red flag.
  
• Ask for free credit reports from credit bodies like Experian, Illion, or Equifax – you want to aim for a good credit score or higher to refinance. 
  
• Make use of your offset account if you have one. Offset accounts can help reduce the interest you pay back on your home loan. 
  

Once you have your ducks in a row, compare refinance rates on home loans like in the table below.