Reserve Bank boss Philip Lowe has facing intense questioning for the second time this week about rising interest rates, inflation and Australia’s cost of living crisis.
Dr Lowe faced his second parliamentary committee on Friday nearly a fortnight after the RBA raised the cash rate for a ninth consecutive time to 3.35 per cent.
The central bank’s governor told the House of Representatives economics committee he’d like less media attention.
After nearly three hours of questioning by lower house MPs on Friday, Dr Lowe was asked: “In short, what keeps you awake at night?”
Dr Lowe replied: “Nothing keeps me awake.
“I’d like to be in the media less, but apart from that, nothing keeps me awake at night.”
Dr Lowe went on to identify “a retreat from globalisation and free trade” and ”further geopolitical events” as his main economic concerns.
The governor has become something of a celebrity after making his ill-fated and highly scrutinised prediction that interest rates would remain low until 2024.
He made a few pointed comments about the media during the hearing on Friday morning, suggesting to the committee that various comments he had made had been misrepresented by journalists.
TWO GROUPS OF AUSTRALIANS
Dr Lowe has split Australians into two groups when it comes to consumer behaviour.
Asked who was causing the demand side of inflation in the economy right now, Dr Lowe said he didn’t want to “single out a particular group”.
The first group was made up of people who didn’t have a large mortgage or any mortgage at all who had recently saved money, had good job prospects, whose wages were rising “quite quickly” and who were therefore spending money, Dr Lowe said.
“There’s a large number of Australians who are in that fortunate position,” he said.
The second group is made up of Australians who had borrowed recently, had a high level of debt and a relatively low income and were feeling first-hand the effects of higher mortgage rates, he said.
A third, related group was made up of people who were paying a lot more rent, he said.
Dr Lowe said there was quite a big disparity in terms of consumer behaviour between these two groups which reflected the “unevenness of monetary policy”.
“And it’s a very difficult for the people who are struggling I know seeing other people who can spend based on technical jobs and lots of savings and a smaller mortgage,” he said.
“It’s a very disparate story across the population.”
But Dr Lowe disagreed that it was wealthier people who were more likely to be driving up inflation through spending.
“I wouldn’t characterise it like that, because we just don’t know enough about where the demand is coming from it,” he said.
“What we know is, right across the country, demand has been strong.”
CAPITALISM WORKS, LOWE SAYS
Dr Lowe has said “capitalism works” and, with some government regulation, it’s the best way for an economy to run.
“I strongly believe in the benefits of a market based economy,” he said.
“That’s the principle — market based economies work, but they do need to operate within the context of a regulatory environment.
“And government has a role to play in that, but I probably can’t say much more than that.”
Dr Lowe said Australians “complain a lot” and could sometimes forget about the quality of life they were afforded compared to many other people around the world.
“We enjoy a quality of life and a standard of living that very few other people in the world enjoy,” he said.
“We’re one of the world’s most wealthiest, prosperous, equal countries. Australia is a fantastic place to live.”
Dr Lowe said Australia became a “fantastic” place to live because of the hard work of the people who live here, as well as private markets operating within a system with “guardrails set by governments”.
“It’s not perfect,” he said.
“But I wouldn’t be going to a different system — keep improving the one we’ve got.”
BANK WILL DO WHATEVER IT TAKES
Dr Lowe has reiterated his position that the bank will do whatever it needs to, to drive down inflation and get it back within the central bank’s target range of 2 to 3 per cent on average, over time.
Inflation — which hit 7.8 per cent in December — is not expected to come back down to anywhere near that range until the end of 2024.
However, the RBA and the federal government expect inflation to have peaked at the end of 2022 and for it to gradually moderate over this year and the next.
Dr Lowe said on Friday the RBA was expecting its “tightening” of monetary policy — eg, lifting interest rates — would help cool inflation, with the effects to be felt until 2024.
Dr Lowe said the RBA was keeping a close eye on data such as retail spending, consumer spending, wages and business surveys.
“They’re the pieces that we put together and we try and form an overall picture from those pieces of data. And we’ll do that again in a few weeks time,” he said.
He said the domestic economy still needed to slow down considerable, suggesting more rate hikes are all but inevitable.
“If we need to stop, we will. If we need to keep going. We will,” he said.
GOVERNOR’S ADVICE TO STRUGGLING AUSTRALIANS
Dr Lowe has told Australians they should “hunt down” good deals on mortgage rates and switch banks if they aren’t happy with their current one.
The governor said the rate of refinancing was at a record high and the banks were competing for customers who were saving “40 basis points on average” on their mortgages from changing lenders.
He called out banks for not passing on higher interest rates to customers with savings accounts.
“The banks have very quick to pass on (interest rates) onto loan rates. But most of them are very slow to pass on to deposit rates,” he said,
“And they need to do better there and the inquiry the government has just announced hopefully will put pressure on to do that.”
Jim Chalmers this week put the nation’s banks on notice to ensure they are passing on interest rates to customers with savings accounts.
The Treasurer has tasked the Australian Competition and Consumer Commission to look into how banks set interest rates for savers, including differences in interest rate increases between bank deposits and home loans.
Speaking to reporters at Parliament House on Thursday, Dr Chalmers said he understood why Australians were “furious” with banks that have raised mortgages but not passed on higher interest rates to deposit holders.
Dr Chalmers also revealed he spoke “frequently” to Dr Lowe about the economy, but said he would never direct the governor on interest rate decisions.
“I don’t ring up the Reserve Bank governor on the morning of the board meeting and say this is the outcome that the government wants,” he said.
LOWE’S MESSAGE FROM BUSINESSES
Dr Lowe has denied businesses were reporting scrimping on costs to create a buffer for more tough times ahead as inflation slowly moderates.
“The main thing we’ve been hearing from business over recent times is it’s hard to get workers, there’s a lot of turnover in the labour market, we’re having to pay more,” he said.
“They’re telling us now it’s still hard to get workers, but not as hard (as it was) and demand is still strong.”
BARRENJOEY IN DEEP FREEZE AFTER LUNCH LEAK
The governor’s recent, controversial lunch with big bank traders hosted by investment bank Barrenjoey has again been raised at Friday’s hearing.
The lunch raised eyebrows because it was held before the RBA released its public statement on monetary policy, which explains the bank’s decision making process behind its monthly decision on the cash rate.
Dr Lowe has largely defended his participation in the lunch, saying the bank needs to “talk to people”.
He said the fact details of the Barrenjoey lunch were leaked to the media has eroded trust between the financial firm and the RBA, given he’d expect that sort of meeting to be off the record.
“There’s nothing untoward about this. If you speak to me, you want to have trust that I’m not going to go and blab to the press the next day,” Dr Lowe said.
“And I expect the same courtesy that I can participate in conversations with people who don’t run off to the press.
“I’ve said that courtesy wasn’t extended after that Barrenjoey lunch and I decided given that we would not be doing further functions for them for quite some time.”
Dr Lowe said earlier on Friday the bank had decided to, going forward, not speak in “private forums” before the release of its statement on monetary policy.
SUPPLY SHORTAGE, NOT INTEREST RATES, DRIVING UP RENTS: LOWE
Dr Lowe has been quizzed about the flow on effect interest rates are having on rents, with landlords pushing up prices and some tenants now struggling to pay for their homes.
“I know it’s really tough when rents are going up so quickly,” Dr Lowe said.
But he said the main driver of higher rents was high demand and a shortage of available homes rather than interest rate rises.
“You can only put your rent up if there’s if there’s a shortage of rental accommodation and the tenant can’t go elsewhere,” he said.
“That’s what’s driving higher rents. It’s not higher interest rates.
“Higher interest rates is the explanation, but the underlying reason is that there’s, at the moment, strong demand for rental accommodation, and there’s not enough rental accommodation on the market.”
Recent analysis from Rate City found a borrower earning Dr Lowe’s reported yearly remuneration of $1m would still be able to borrow $5.5m from the bank despite how high interest rates have risen.
MORTGAGE STRESS ‘UNEVEN’
Reserve Bank assistant governor Brad Jones has taken a turn in the hot seat, where he has been asked just how much trouble Australian mortgage holders are in.
Dr Jones said the RBA was closely monitoring mortgage stress and would release its next batch of detailed analysis in April.
He said most borrowers were faring better than people might think and fewer than 0.5 per cent of borrowers were in negative equity — when a property is worth less than the mortgage taken out on it.
But Dr Jones acknowledged there was a big disparity between Australian households.
“We see a very uneven picture,” he said.
“On one hand, you’ve got around half our variable rate occupiers who are more than one year ahead on their mortgage payments, in fact, about a third are more than two years ahead.
“At the other end of the distribution, we observe around 10 per cent of variable rate unoccupied borrowers who have got virtually no spare cash flow after they meet their mortgage payments and their living costs.”
Dr Jones said a “reasonable share” of those households were on low incomes and therefore had a limited ability to cut back on consumption.
“There’s no question that there’s a segment of the community that are hurting now,” he said.
BANK ‘DID TOO MUCH’: LOWE
Dr Lowe has conceded the RBA “did too much” when it took the cash rate down to a historic low of 0.10 per cent as Australia weathered an economic storm at the height of the Covid-19 pandemic.
“At every one of those meetings that we’re having in 2020, we had them saying, what more can we do to help Australians through this dire, dire situation?” Dr Lowe said.
“And we did what we thought was right, based on information we had. It turned out we did too much. And we’ve had to backtrack.”
Dr Lowe said the bank wanted to do everything it could to try to keep Australians in jobs and with enough money to survive at a time when there was a lot of uncertainty about how long the pandemic would last for.
“The economy recovered much more quickly. The vaccine came and here we don’t see a mask inside … we returned to life much more quickly than anyone had expected and the economy’s bounced back quickly,” he said.
Dr Lowe has copped intense criticism for saying the bank thought interest rates would remain low until 2024.
Many Australians took out home loans on the back of his advice, before the inflation crisis struck and the RBA started lifting interest rates at breakneck speed in May last year.
Dr Lowe, who has since apologised, said on Friday his decision to communicate the bank’s expectation for interest rates was meant to reassure the community.
“That was part of a deliberate strategy to send to the community a message that we would be there with you we will do what was necessary,” he said.
“We would we would keep the interest rates at extraordinarily low levels, if that was what was needed. And it turned out that that wasn’t what was needed.”
TWO MORE RATE RISES LIKELY
Dr Lowe has signalled at least two more interest rate rises are on the way, saying the release of this week’s surprisingly soft jobs data won’t change the bank’s course.
Australia’s official unemployment rate jumped unexpectedly to 3.7 per cent in January, according to data released on Thursday by the Australian Bureau of Statistics.
The data missed market expectations, but Dr Lowe said it was “just one piece of information” considered by the RBA board.
Asked if the data had made him reconsider the RBA’s guidance that at least two more rate rises are needed, Dr Lowe said: “No, it didn’t”.
“There’s uncertainty about the seasonal adjustment issues,” he said.
“And we know from other sources that businesses still want to hire workers. The job ads are high.”
‘YEARS’ BEFORE FULL IMPACT OF RATE HIKES FELT
Dr Lowe has acknowledged there is a “lag” between interest rates rising and any subsequent cooling effect on the economy.
“We’re trying, it’s difficult, but we’re trying as best we can to factor those lags into our decision making progress. We talk about them at every board meeting,” he said.
Dr Lowe said slowing the economy would “take time” but the bank was expecting results from tightening monetary policy this year and next.
“And it takes time and we will have slower growth next year in 2024. Again, because of the measures we’re taking now,” he sad.
RBA REJECTS BLAME FOR $5 NOTE BLINDSIDE
Dr Lowe has responded after it was revealed the RBA’s decision not to feature King Charles III on the $5 note was not run by the monarch’s representative in Canberra before it was publicly announced.
Paul Singer, the Governor-General’s secretary, told a senate estimates hearing on Monday that he was surprised that Government House was not told of the change ahead of time.
“The first I became aware of the decision was the media release from the Reserve Bank,” he said.
Earlier this month, the RBA confirmed that King Charles III would not replace his mother, Queen Elizabeth II, on the Australian $5 note.
A design honouring the culture and history of First Australians will instead feature on the pink note.
“Given the national significance of the issue, the board decided to consult the Australian government before it made a decision,” Dr Lowe said on Friday.
“In response, the government indicated its support for design …
“It will continue the RBA’s proud tradition of having First Australians imagery on our banknotes.”
CONTROVERSIAL LUNCH
Dr Lowe was pressed on reports he gave a private briefing to traders at the country’s major banks at a private lunch hosted by investment bank Barrenjoey.
He said the bank had changed its rules as a result of the criticism.
“The main message I’ve taken away from this — and we’ve changed our practice — is that we shouldn’t speak in private forums before the statement on monetary policy is released,” he said.
But Dr Lowe said he would “continue to talk to the private sector” in general.
“I feel very strongly about this. We can’t live in a bubble in our in our building in Martin Place,” he said.
“We’ve got to get out and talk to people, we’ve got to hear what they’ve got to say. And I like it, I like asking people questions as well.”
BANK ON A “NARROW PATH”
Dr Lowe said the central bank was trying to navigate the “narrow path” between bringing down high inflation without falling into a recession.
He said the RBA was facing two big risks in doing this.
“One is the risk of not doing enough, which would result in high inflation persisting, as I said earlier it would then be costly to bring it down later on,” he said.
“The other is the risk that we move too fast or too far and the economy slows by more than is necessary to bring inflation down in a timely way.”
Dr Lowe suggested it was too soon to say whether the country would emerge from this period unscathed.
“It is still possible for us here in Australia to navigate this narrow path, especially with inflation and wage expectations remaining contained and issues on the supply side continuing to be resolved,” he said.
“It’s also possible that we get knocked off this narrow path. Not surprisingly, given the various uncertainties there are a range of views in the community of where the main danger lies.”
“DANGEROUS” NOT TO TRY TO BRING DOWN INFLATION
In his opening statement, the RBA governor said it would be dangerous not to contain and reverse high inflation even though he knows people are struggling with higher interest rates.
He said the central bank knew people were finding managing higher interest rates very difficult.
But he defended the bank’s approach, saying not raising the cash rate would have been even worse.
“The end result is even higher interest rates and greater unemployment to bring inflation back down. So it’d be dangerous indeed, to not contain, and to reverse this period of high inflation,” he said.
“At its core, the rise in interest rates has been required to make sure that the current period of high inflation in Australia is only temporary.”
He said if high inflation was “damaging and corrosive” and if it became “ingrained”, bringing it back down would be “very costly”.
“History teaches us that once inflation becomes ingrained, the end result is even higher interest rates and greater unemployment to bring inflation back down,” he said.
“So it’d be dangerous indeed, to not contain and to reverse this period of high inflation.”
Mr Lowe is expected to face three hours of questioning on Friday.
EARLIER THIS WEEK
This week at Wednesday’s senate estimates hearing, Dr Lowe hinted more interest rate rises were on the horizon despite struggling Australians personally sending him “disturbing letters” about their hardships.
Wednesday marked his first public appearance since the RBA hiked rates for a ninth consecutive time earlier this month.
Since May, RBA board has aggressively raised the cash rate — which guides interest rates sent by lenders — from 0.1 per cent to 3.35 per cent.
Financial markets now expect the cash rate to hit 4.1 per cent by August.
Dr Lowe said on Wednesday he had an “open mind” on further rate rises but didn’t know just how far the bank would go.
“It will depend upon inflation data, resilience, spending, and what’s happening with wages. I don’t think we’re at the peak yet but how far they need to go, we’re still unsure,” the governor said.
Asked if he deserved to hold onto his job, Dr Lowe said he intended to serve out his seven-year term which is due to end in September.
He did not indicate if he would be seeking a three-year extension to his term.
The federal government last year ordered a review of the RBA, due mid-year. It’s expected that review will help form Treasurer Jim Chalmers’ decision regarding whether to reappoint Dr Lowe.
Dr Lowe apologised in November for having said he didn’t expect interest rates to rise until 2024.
Last week, the RBA indicated there are more hikes to come, as it uses higher interest rates to try to cool the economy in its quest to lower inflation, which is sitting at a 32-year high of 7.8 per cent.