RBA’s message changing as rate rises keep coming

The Reserve Bank has gone from believing it could gently bring down inflation with moderate interest rate rises to fearing it will lose the battle to prevent a nationwide breakout in prices and wages.

Before its March meeting on Tuesday, at which the RBA board is expected to agree on a record 10th consecutive increase in official interest rates to 3.6 per cent, regular commentary by bank governor Philip Lowe shows how much the institution’s views have changed as inflation pressures have intensified.

Statements by Reserve Bank governor Philip Lowe after every bank board meeting show how its thinking about inflation and interest rates has changed since April last year.Credit:James Brickwood

After maintaining as late as November 2021 that no rate rises were likely until 2024, Lowe caught many borrowers by surprise when the bank lifted them from a record-low 0.1 per cent to 0.35 per cent in May last year.

Another four 0.25 percentage point and four 0.5 percentage point increases since then have taken the cash rate to 3.35 per cent. While rates are climbing, a small number of economists believe the Reserve may start rate cuts by year’s end.

Following every board meeting, Lowe releases a statement explaining any change in rate settings as well as the bank’s view on how the economy is performing and the outlook for interest rates.

In April last year, when the cash rate was at 0.1 per cent, Lowe noted that while inflation had increased it was still “lower than in many other countries”.

While Lowe said inflation would probably increase, the RBA board wanted to see “actual evidence that inflation is sustainably within the 2 to 3 per cent target range before it increases interest rates”.

Within weeks, the Reserve had that evidence as the March-quarter consumer price index showed inflation jumping to 5.1 per cent from 3.5 per cent. It was a key reason for the bank’s decision in May, during last year’s federal election campaign, to start increasing interest rates.

In May, Lowe was warning that inflation had “picked up significantly and by more than expected” and that more rate increases were likely. This was confirmed in RBA forecasts released soon after that month’s meeting.

At the time, it expected inflation to reach 4.3 per cent by the June quarter this year after peaking at 5.9 per cent in the December quarter. By the middle of next year, inflation was tipped to be just inside the RBA’s 2 to 3 per cent target band.

The jobless rate was likely to drift up, but only marginally, to 3.6 per cent by the June quarter of next year.

But as inflation has climbed, and the Reserve has lifted interest rates, its forecasts have become more bleak.

Forecasts after this year’s February meeting showed inflation was expected to be at 6.7 per cent by the middle of this year and at 3.6 per cent by mid-2024. Inflation probably peaked at 7.8 per cent in December.

The jobless rate is expected to hit 4.1 per cent in June next year and keep climbing to 4.4 per cent in mid-2025.

It was Lowe’s comments after the February meeting that forced financial markets and economists to reappraise where the RBA would eventually take the cash rate.

In December, the RBA board had discussed a halt in rate rises as well as half a percentage point increase. But in February, Lowe cut any suggestion of a rate pause.

“The board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary,” he said.

While supposedly “temporary”, inflation has now been above the RBA’s 2 to 3 per cent target band since December 2021. It’s not expected to return to that band until the second half of 2025.

The property market has felt the impact of higher interest rates.Credit:Rhett Wyman

That’s one of the reasons financial markets have priced in the cash rate reaching 4.2 per cent by September, with rate cuts not expected until April or May 2024.

Some economists, however, believe the RBA may be forced into cutting interest rates earlier, with the Commonwealth Bank forecasting a reduction in the cash rate through the final three months of this year.

For someone with an average $604,000 home loan, the Reserve’s interest rate rises have added almost $1100 to monthly repayments. If financial markets are correct, this will have climbed to $1381 by October.

Ordinary Australians are losing confidence in the Reserve Bank’s interest rate settings.

A national survey of more than 3100 people by financial comparison website Canstar found 54 per cent believed higher interest rates were not the solution to reducing consumer expenditure and bringing down inflation.

More than half said they have lost confidence in the RBA to control inflation, compared to 44 per cent three months ago.

“Households paying off a loan on either their own house or on an investment property are right at the pointy end of interest rate increases. They are rightly nervous about the Reserve Bank and government’s ability to ease inflation and cost-of-living pressures,” Canstar finance expert Steve Mickenbecker said.

Tuesday’s RBA board meeting will be the last before Treasurer Jim Chalmers receives the independent review he commissioned into the Reserve Bank soon after taking office last year.

That review is expected to recommend changes around how the Reserve Bank communicates with the public and financial markets about its monetary policy changes among a host of other things.

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