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‘Way too early’ to talk about interest rate cuts, says Lowe

Speaking at the National Press Club, Reserve Bank governor Dr Philip Lowe poured cool water on any narrative of rate reductions, flagging that the central bank’s inflation target (of 2 to 3 per cent) will not likely be achieved for another two years.

user iconAnnie Kane 05 April 2023 Big Law
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Editor’s note: This story originally appeared on Lawyers Weekly’s sister brand, Mortgage Business.

Philip Lowe has said that it’s “way too early” to be talking about reductions in the official cash rate, noting he expects target inflation won’t be hit until 2025.

Addressing the National Press Club in Sydney on Wednesday (5 April), the day following the Reserve Bank of Australia’s decision to hold the cash rate at 3.60 per cent for April, the RBA governor outlined that the central bank believed it was “way too early” to start talking about interest rate cuts.


Earlier this week, Lawyers Weekly explored how lawyers could react if the cash rate was paused — as it ultimately was.

In his address, the RBA governor said that the decision to hold interest rates steady this month was taken to give the board “more time to assess the economic outlook and the impact of the increases in interest rates so far”.

Reflecting that the cash rate has gone up 3.5 percentage points in the past 10 months, Mr Lowe conceded that the “large increase over a short period” had been “difficult for many people” — particularly those on a variable rate mortgage.

“The first increases [in the cash rate] were necessary to withdraw the support provided during the pandemic,” he said, “and then the more recent increases have been required to move monetary policy into restrictive territory to combat the highest rate of inflation experienced in Australia in more than 30 years”.

Mr Lowe argued that the alternative to the recent interest rate increases would have been “more persistent inflation and, ultimately, even higher interest rates and more unemployment”.

He continued: “The decision to hold rates steady this month does not imply that interest rate increases are over. Indeed, the board expects that some further tightening of monetary policy may well be needed to return inflation to target within a reasonable time frame. It decided, though, that it was prudent to hold rates steady this month to allow more time to assess the impact of the increases in interest rates to date and the economic outlook.

“The board is conscious that monetary policy operates with a lag and that the full effect of the increases to date is yet to be felt. It is also conscious that there are significant economic uncertainties at the moment. Given these lags and uncertainties, the board judged that, with monetary policy now in restrictive territory, it was time to hold interest rates steady and accumulate more information.”

The RBA governor said that this pause was consistent with previous interest rate cycles, adding it has been “common” for the RBA board to move interest rates multiple times, then “wait for a while to assess the pulse of the economy, and move again if the situation warranted doing so”.

“So, it is a return to that world,” he said.

Responding to questions from media about the trajectory of interest rates (given its decision to halt its tightening cycle this month), Mr Lowe said “the situation remains unclear” as to its path for the May rate call (as it is dependent on getting a “clear signal” from economic data over the next few weeks).

However, he added: “We think we may well have to increase rates again.”

Despite some economists and the market flagging that cash rate cuts might happen before the end of the year, Mr Lowe said that he believed it was “premature to talk about interest rate cuts”.

“Remember, we’ve got the highest inflation rate for 30 years, the lowest unemployment rate in 50 years, and still two years before we get the inflation rate to the target range. So it’s too early — way too early — to talk about interest rate cuts,” he said.

Mortgage Business editor Annie Kane asked Mr Lowe, at the Press Club address, what mortgage data the central bank considered when approaching its rate decisions (for example, arrears levels), to which the RBA governor said arrears rates and inflows and outflows to offset accounts were a key signal as to how mortgagors were faring.

Mr Lowe responded: “We’re looking at the arrears rates — 30/90 days and above 90 days — very carefully, and we have very good data flow from the bank and APRA on that. There are no specific thresholds [on arrears] that we have [that might influence the cash rate decision], but the arrears rates at the moment … while they are not the lowest they have ever been, they are close to it. So even if they rise quite a bit, they’re not going to be particularly high.”

However, he said that the RBA was “looking very carefully” at the flow of money into mortgage offset accounts.

“This is the way that people with a mortgage save; the money goes into the offset account. And we’ve noticed, in the recent few months, that the flow of money into these offset accounts is slowing. That suggests that people don’t have as many free cash resources as they previously did … that’s a really important source of information,” he said.

The RBA governor continued: “We have very disaggregated data on individual mortgages, which allows us to track households that are putting money into their offset accounts; some households are taking money out of those offset accounts. That’s a more important indicator for us than arrears rates, which are still low.”

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