PHOTO: RBA boss Philip Lowe. FILE
Reserve Bank governor Philip Lowe has indicated interest rates may need to be hiked even higher during Australia’s cost of living crisis, saying that the bank will be “very carefully” watching inflation over the summer.
“We need to bring inflation back to target and I think it will require higher interest rates and our forecasts have been prepared on that basis,” Mr Lowe said during a speech to business leaders in Hobart on Tuesday.
“We are not on a preset path here.”
Inflation is set to hit 8 per cent by the end of 2022 according to the RBA. (AAP Image/Lukas Coch) NO ARCHIVING
Senior economists have predicted that the RBA will lift the cash rate by at least another 25 basis points by the end of the year, with Westpac predicting that the rate could peak at 3.85 per cent next year.
Mr Lowe indicated rate hikes could become more aggressive in response to ever-rising inflation.
“If we need to step up to larger increases again to secure a return of inflation to target we will do that,” he said.
Just how aggressive the hikes will be will rely on how the Australian economy unfolds over the next few months.
“Similarly, if the situation requires us to hold steady for a while, we will do that,” he said.
A mortgage of $1 million has seen monthly loan repayments increase by more than $1500 since May according to RateCity. Picture: NCA Newswire / Gaye Gerard
“Given the uncertainties regarding the outlook, we will be watching very carefully how the economy and the inflation pressures evolve over the summer.”
The RBA lifted Australia’s cash rate another 25 basis points to 2.85 per cent on Tuesday, a smaller rise than previous months, but Mr Lowe indicated the central bank would be carefully looking at the effect of current rates on the economy and considering larger rises in the immediate future.
Inflation is now predicted to reach 8 per cent this year, much higher than the 2-3 per cent target set by the RBA, a goal Mr Lowe said he was “committed to doing what’s necessary to achieve”.
“The board is seeking to return inflation to two to three per cent, while at the same time keeping the economy on an even keel. I think it is still possible to do this,” he said
The average Sydney mortgage holder can expect to be hit with a $115 lift to their monthly mortgage repayments after the 25bp rise in the cash rate. (Photo by Lisa Maree Williams/Getty Images)
“But there is a lot of uncertainty at the moment, and we could be knocked off that narrow path particularly by business abroad.”
With homeowners already struggling to keep up with the rising cost of mortgage repayments, Mr Lowe flagged the dangers of not lifting the cash rate to combat inflation.
“The eel of inflation will be with us for longer [if we don’t lift rates] and the eventual increase in interest rates needed to bring inflation down will be even larger is would increase the risk of a seed, severe recession, and a sharp rise in unemployment,” he said.
Mortgage holders with a loan of $500,000 are now paying $760 more per month than they were in May according to RateCity.
That number jumps to $1,140 per month for a $750,000 loan and $1,520 per month for a $1 million loan.
Treasurer Jim Chalmers has expressed sympathy for mortgage holders struggling with repayments.
House prices have continued to fall as the RBA lifts interest rates. (Photo by Lisa Maree Williams/Getty Images)
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