Will the RBA's interest rate hikes slow down this year?

RBA boss Philip Lowe has said the central bank will plough forward with its interest rate hikes until inflation is brought within an acceptable range, but the scale of increases will likely taper down in the months ahead.

Speaking at a House of Representatives Standing Committee on Economics on Friday, Lowe acknowledged that the tightening cycle had commenced much sooner, and progressed much more rapidly, than initially expected.

“In terms of the outlook for interest rates, the Reserve Bank Board expects that further increases will be required to bring inflation back to target. We are not on a pre-set path, though,” he said.

“At some point, it will be appropriate to slow the rate of increase in interest rates and the case for doing that becomes stronger as the level of interest rates increases.”

Having already lifted the cash rate by 225 basis points since May, the RBA knows its aggressive tightening schedule hasn’t been received well by households already squeezed by rising costs of living.

But Lowe defended the Board’s approach as necessary to keep inflation from becoming entrenched, which he argued would be even more damaging to Australia’s economic prospects.

“We are seeking to do this in a way that keeps the economy on an even keel. It is possible to achieve this, but the path here is a narrow one and it is clouded in uncertainty,” he said.

He also acknowledged that the pick-up in wages growth was not a major factor driving inflation upwards, but if demands for higher wages persist it could stymie efforts to restore price stability.

“Looking forward now, it is important that we avoid a cycle where higher inflation leads to higher wages and inflation remaining high. This type of cycle would lead to higher interest rates, a weaker economy, and higher unemployment,” he said.

“Businesses, too, have a role in avoiding these damaging outcomes, by not using the higher inflation as cover for an increase in profit margins.”

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Lowe also addressed two major criticisms directed at the RBA in recent months: that it misled households by suggesting interest rates wouldn’t rise until 2024, and that its support during the pandemic period was a contributing factor to today’s runaway prices.

On the former, Lowe said the RBA had hinged its cash rate forecasts on the expectation that inflation would remain low and that economic conditions would continue to worsen due to the pandemic.

“I am frequently reminded that many people interpreted our previous communication as a promise, or a commitment, that interest rates wouldn't rise until 2024,” he said.

“This was despite our statements on interest rates always being conditional on the state of the economy. This conditionality often got lost in the messaging.”

As for the claim that the central bank offered too much support over the past two years, Lowe said that given the outlook at the onset of the pandemic, “the bigger policy mistake would have been to do too little, rather than too much.”

“In that environment, the Reserve Bank Board wanted to do what it could to help and to shore up confidence. We also were also seeking to provide some economic insurance against the worst possible outcomes,” he said.

“If we had done too little and the worst had occurred, Australians could have paid a heavy price. As things turned out, thankfully, the worst was avoided,” he said.

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