RBA boss defends rate hikes in fight against “corrosive” inflation

Reserve Bank governor Philip Lowe

Reserve Bank of Australia governor Philip Lowe has weighed in on the impact of monetary policy on Australia, while acknowledging the growing unpopularity of the central bank’s decisions among everyday Australians.

Speaking before the Senate Economics Legislation Committee, Lowe and RBA deputy governor Michele Bullock decided to forgo any opening statements and jumped straight into the question and answer session.

Unsurprisingly, inflation was a recurring theme throughout the hearing, with Lowe emphasising how corrosive it is to the economy and that it must be brought down at all costs.

“People are really hurting, I understand that. But I also understand that if we don’t get on top of inflation it means even higher interest rates and more unemployment,” he said.

“If inflation stays high, it’s very damaging to the economy. It worsens income inequality, it makes it harder for businesses to plan, and it erodes the value of people’s savings.”

He reiterated comments made in this month’s Statement on Monetary Policy, saying that the RBA is currently navigating a narrow path and the risks are two-sided.

On the one hand, higher rates could lead to greater economic contraction than the RBA intends. On the other, there is a risk that spending proves more resilient than the Board would like and inflation remains elevated. 

“I understand why some people focus on the risk on the one side but we’ve got to be attentive to the risk from higher inflation,” he said.

“In the 30 years since we’ve had higher inflation, many people have forgotten the really serious damage it does to people, to livelihoods, to the functioning of the economy if it persists.”

RELATED: What is the cash rate and how does it affect you?

Lowe defended the use of monetary policy over fiscal policy in times where demand is too high and needs to be brought down, arguing that interest rates are the more nimble tool.

“I subscribe to the view that fiscal policy, most of the time, should be dealing with the structural issues and the structural budget position, and except for extraordinary times it’s not the best tool to use to manage aggregate demand,” he said.

The central bank boss also caught a lot of flak for the pain currently being inflicted on borrowers and renters. While he also acknowledged the RBA has an unpopular task before it, he pushed back on the idea that he is the sole decision maker.

“It’s not just me making these decisions, there are nine people, based on the advice of a large staff,” he said.

“That’s our job and it’s unpopular — I accept that. That’s why the central bank is independent in its decision making from the political process.”

He also shifted the blame for rising rents, arguing that landlords can only successfully pass on higher interest rate costs to tenants if the balance between supply and demand allows it.

RBA intent on lifting rates higher

The RBA’s nine rate hikes haven’t been received well by the nation’s borrowers, but households will have to brace for more as the central bank doubles down on its fight against inflation.

Since the tightening cycle began in May last year, the RBA has lifted rates by 325 basis points — the fastest the cash rate has climbed since 1994.

The pressure on household budgets has seen consumer confidence plummet, but the RBA has committed to raising rates further to keep high inflation from becoming entrenched.

“As far as you can influence the broader economy with rate hikes, I think they’ve worked,” said Mozo’s banking expert Peter Marshall.

“But this year there’s more risk that if the RBA pushes too hard, they could drive the economy into decline rather than the soft landing they’re always talking about.”

According to Roy Morgan, 24.7 per cent of borrowers are currently considered at risk, meaning between 25 and 45 per cent of their after-tax income is being eaten up by mortgage repayments.

Assuming the RBA hikes rates in March, which most analysts consider a certainty at this point, that number will rise to 26.3 per cent.

Those who bought just prior to the tightening cycle are particularly vulnerable. For this cohort, the dual shock of higher repayments and dipping home values will make this year a difficult one, especially if they intend to refinance soon.

Expiring fixed rate terms to test borrowers

The crisis could get even uglier as borrowers who took advantage of record low fixed rates over the early pandemic period are thrust back into a vastly different interest rate environment.

According to the RBA, around one third of borrowers are currently on a fixed rate loan, down from around 40 per cent in early 2022.

Over the next year, around half of those fixed terms will expire and thousands of borrowers will be moved over to a much higher variable rate 

Among lenders we track, the average variable rate currently sits at 5.71% p.a. For someone who fixed a $600,000 loan at 2% p.a. two years ago, switching to a rate that high would see their monthly repayments jump from $2,543 to $3,664.

But Lowe brushed off concerns about how these borrowers will fare, pointing to the large pool of excess savings households have built up over the past few years.

“The banks tell us that most people with fixed rate loans have been pretty cautious. They knew that fixed rates weren’t going to stay low forever,” Lowe told the estimates committee.

“Not everyone is in that case though. Some people have taken the low interest rate to allow them to spend more, and those people are going to face a lot more difficulty when interest rates go up.” 

For these borrowers, the jump in repayments will prompt a major rethink of household budgets, which is just what the RBA wants to see happen to bring inflation to a more manageable level.

For more information, visit our RBA interest rate tracker page. And if you feel that refinancing is in order, be sure to visit our home loan comparison page, where you’ll be able to filter your search by rate and type.

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