Reserve Bank of Australia Governor Hints at an End to Aggressive Rate Hikes

Governor of the Reserve Bank of Australia Philip Lowe makes a speech in Sydney, Australia, on March 19, 2020. Brendon Thorne/Getty Images

The governor of Australian central bank, the Reserve Bank of Australia (RBA), has signalled that it might stop raising interest rates aggressively and adopt a more gradual approach.

This comes after the central bank lifted the official cash rate for the fifth consecutive time in 2022 on Sept. 6, taking it to 2.35 percent from the previous 0.1 percent before May.

Speaking at the Anika Foundation in Sydney on Sept. 8, RBA governor Philip Lowe said the case for slowing down interest rate increases was growing stronger.

“We are conscious that there are lags in the operation of monetary policy and that interest rates have increased very quickly,” Lowe said.

“And we recognise that all else (being) equal, the case for a slower pace of increase in interest rates becomes stronger as the level of the cash rate rises.”

Nevertheless, he said the RBA board did not follow a pre-set path in making decisions and would do whatever it took to control ballooning inflation.

The annual inflation rate stood at 6.1 percent in the June quarter, with the figure for the third quarter to be released in late October.

Economists’ Interpretation of Lowe’s Speech

Economists have said that they expect the RBA to lower its future tightening to a more moderate 0.25 percent, rather than the 0.5 percent increases in the past four months.

In particular, National Australia Bank economists predicted the cash rate could climb by 0.25 percent in October and November to reach 2.85 percent.

Meanwhile, RBC Capital Markets economist Su-Lin Ong said Lowe confirmed that the cash rate was approaching the neutral rate (the interest rate at which the economy is in equilibrium), which was what the RBA wanted to achieve before halting the tightening cycle.

Commuters walk past the Reserve Bank of Australia building in Sydney, Australia, on June 07, 2022. Brendon Thorne/Getty Images

In his speech, Lowe said there were three areas of uncertainty to be closely monitored by the RBA board.

The slowing outlook of the global economy was the central bank’s first concern.

“Some slowing in the global economy will help bring inflation down, but a sharp slowing would make the job of delivering a soft landing here in Australia much harder,” Lowe said.

In addition, he noted that the RBA was carefully observing the changes in inflation psychology.

“If workers and businesses come to expect higher inflation, and wages growth and price-setting behaviour adjusts accordingly, the task of navigating that narrow path will be very difficult, if not impossible,” Lowe said.

As the full impacts of the aggressive tightening cycle were still realising, the governor said he was not sure how Australian households would respond to higher interest rates.

Lowe Rejects Calls for Resignation

While giving his thoughts on the interest rate outlook at the event in Sydney, Lowe also rejected calls for his resignation despite mounting criticism over the central bank’s interest rate guidance during the COVID-19 pandemic.

“I can assure you I have no plans to resign,” he said.

This came after the Green party and Nationals senator Matt Canavan called on the governor to take responsibility for saying interest rates would not rise until 2024.

Right after the RBA lifted the cash rate on Sept. 6, Greens Treasury and Economic Justice spokesperson Nick McKim said Lowe should resign for inducing “hundreds of thousands of Australians into taking out massive mortgages.”

Greens Senator Nick McKim addresses the media at Parliament House in Canberra, Australia, on May 14, 2020. Sam Mooy/Getty Images

Echoing the sentiment, Canavan said Lowe should depart when the RBA lifted the cash rate for the first time.

“I think this RBA governor should have gone when he promised not to raise rates until 2024,” said Canavan, as reported by Sky News.

“And now he’s broken that promise five times–people took on debt based on what the governor said. There has to be accountability.”

Lowe’s Defence

In his defence, Lowe said the RBA had two options in the face of high inflation, which was partly due to the central bank’s monetary policy during the pandemic.

“We said: ‘Well, what’s the bigger policy error to make? Go too little, or do too much?’” he said.

“If we do too little, and unemployment rates hit 15 per cent, and tens of thousands of people are dying every month, then the economy, our society, would have paid a very heavy cost.”

Lowe then said the alternative was overdoing it and that when the RBA raised the interest rates, he got criticism calling for his resignation.

Furthermore, the governor denied he promised that rates would be put on hold until 2024.

“What we said was we thought the pandemic was going to have long-lasting disruptive effects on the economy that would keep inflation low and would keep unemployment high for years, and we wanted to do what we could to prevent that,” he said.

“And that meant we were likely to keep interest rates low for a long period of time out to 2024, so it was highly conditional.”