Reserve Bank governor Philip Lowe warns Australian borrowers to prepare for more interest rate rises

Australia’s most powerful banker is urging borrowers to prepare for more interest rates rises with inflation expected to remain high for several more years.

Reserve Bank of Australia governor Philip Lowe said it would be at least two years before inflation fell back within its two to three per cent target.

This would mean several more interest rate rises in 2022 and 2023 before inflation peaked later this year at the highest level in 32 years, eroding the savings buffer of borrowers.

‘As interest rates start to rise, those buffers will be eaten into and the fact that households have more debt than they used to, it will start to bite,’ Dr Lowe told the American Chamber of Commerce in Australia on Tuesday.  

‘We’re very conscious of that.

‘As an individual, I am concerned about the people who borrowed too much and who could get themselves into trouble.

‘Make sure you have buffers, be prepared, the future’s uncertain.

‘Some people will have problems, and as an individual, that saddens me.’  

Without unemployment at the lowest level in 48 years, Dr Lowe sounded the alarm about surging wages potentially feeding inflation like the 1970s – leading to even higher interest rates.

Reserve Bank of Australia governor Philip Lowe said it would be at least two years before the inflation fell back within its two to three per cent target

Dr Lowe told the AmCham event in Sydney inflation would remain above the RBA’s target for at least two more years as petrol and electricity prices remained high.

‘It’s a couple of years away,’ he said. 

‘It’s going to be some years before inflation’s back in the two to three per cent range.

Dr Lowe last week predicted inflation would hit seven per cent by the end of 2022 for the first time since late 1990.

Headline inflation in the year to March surged by 5.1 per cent – the fastest pace since 2001 with $2 a litre petrol making up a quarter of that increase.

The underlying measure of inflation, known as the trimmed mean stripping out volatile items like petrol, rose by 3.7 per cent. 

The Reserve Bank in May raised the cash rate by 0.25 percentage points, marking the first increase since November 2010. 

This ended the era of the record-low 0.1 per cent cash rate, taking it to 0.35 per cent. 

Another rate rise followed in June, with the 0.5 percentage point increase the steepest since February 2000. 

Dr Lowe told the American Chamber of Commerce in Australia on Tuesday he was concerned about borrowers who had taken on too much debt (pictured is an auction at Hurlstone Park in Sydney)

The existing cash rate of 0.85 per cent is now the highest since October 2019 before the pandemic. 

The RBA minutes of that June meeting, released on Tuesday, revealed board members debated on whether to increase the cash rate by 0.25 percentage points or 0.5 percentage points.

A higher increase was chosen to tackle inflationary expectations where providers of goods and services persistently passed on higher prices to consumers.

‘In such an environment, there is a heightened risk of persistently high inflation, especially if expectations of higher inflation become entrenched,’ the minutes said.

‘If that were to occur, the task of returning inflation to the target would become more difficult and come at a higher cost in terms of lower levels of economic activity and employment. 

‘Raising the cash rate by 50 basis points at the current meeting would help to mitigate this risk.’

The RBA minutes noted the board was concerned about wage pressures with unemployment in May remaining at a 48-year low of 3.9 per cent.

‘Labour market conditions were the tightest they had been in many years and wage pressures were emerging,’ it said.

‘Timely measures of wages indicated that labour cost pressures were likely to broaden and pick up further in the period ahead.’

From July 1, Australia’s 2.7 million minimum wage and low-paid workers on awards will be receiving pay rises of up to 5.2 per cent.

While Dr Lowe wants wages growth back above 3 per cent, he was concerned about growth above 3.5 per cent (pictured is a Sydney waitress)

Across the labour market, wages grew by just 2.4 per cent in the year to March and have been stuck below the long-term average of 3 per cent since mid-2013.

While Dr Lowe wants wages growth back above 3 per cent, he was concerned about growth well above 3.5 per cent.

‘I was complaining when they started with a two, I hope I don’t get into an environment where I’m complaining that they have a five in front of them,’ he said. 

‘In the seventies, we got into trouble because wages growth responded mechanically to the higher inflation rate, then that becomes persistent and then you have to have higher interest rates and a downturn to get inflation down.

‘I’m hopeful we can avoid that.’

Dr Lowe said higher-than-average wage increases would fuel inflation. 

‘We can have increases in some parts of the labour market bigger than that for a short period of time but if wage increases become common in the four and five per cent range, then it’s going to be harder to return inflation to two-and-a-half per cent,’ he said. 

The Commonwealth Bank, Australia’s biggest home lender, is expecting another half a percentage point rate rise in July.

This would be followed by 0.25 percentage point increases in August, September and November, taking the cash rate to 2.1 per cent – the highest May 2015.

The Commonwealth Bank, Australia’s biggest home lender, is expecting another half a percentage point rate rise in July. This would be followed by 0.25 percentage point increases in August, September and November, taking the cash rate to 2.1 per cent – the highest May 2015 (pictured are Sydney teller machines)

Westpac is expecting another rate rise in February 2023 that would take the cash rate to 2.25 per cent – which would mark the steepest rate rises in less than a year since 1994.

The RBA minutes noted financial markets were expecting a 2.75 per cent cash rate by December 2022. 

Inflation was not expected to decline back towards the top of the RBA’s two to three per cent targeted until 2023.

Nonetheless, Dr Lowe was confident Australia would avoid a recession, even though New Zealand suffered a 0.2 per cent contraction in the March quarter as the US economy shrank by 1.5 per cent on an annualised basis during the same period.

‘I don’t see a recession on the horizon,’ he said. 

‘It’s possible that at some point in time, the unemployment rate will rise but I don’t think it needs to rise.’