In a surprising move, the governor of the Reserve Bank of Australia (RBA) has made a vow concerning interest rates. The promise from the RBA governor, Philip Lowe, comes as Australian households prepare themselves for another rate hike in the coming days.
Households across the country are already overstretched financially, and many are struggling to determine how they will manage when interest rates rise again. However, while rate hikes are now inevitable as the RBA battles to control inflation, Mr Lowe said that the increase in July would not be as high as many feared.
Higher rate rise ‘not on the table’
Many people have been bracing themselves for an increase of 0.75% when the reserve bank meeting takes place next week. However, the governor has promised that such an increase is ‘not on the table’ on this occasion.
Mr Lowe even went as far as to say that the central bank is not planning any increases of 0.75% and that the RBA would graduate any steps to increase the base rate. This likely means the increase for July will be either 0.25 or 0.5%.
The promise comes after May saw the central bank increase interest rates by a higher-than-expected 25 basis points, taking the base rate to 0.35%. Many experts at that time had expected a lower rate hike of 15 basis points.
The following month brought even worse news for homeowners, as the central bank hiked interest rates by another 0.5%, taking the base rate to 0.85%. This increase also surprised many industry experts who had not expected such a significant increase.
On the back of those unexpectedly steep increases, some were concerned that the July rate hike would be even more significant, but Mr Lowe has ruled out a drastic increase with his interest rate vow.
There have been suggestions recently that the interest rate could reach 4% this year. However, for this to happen, there would need to be at least one rate hike of 0.75%. With Mr Lowe promising that this will not occur, the base rate likely won’t reach that level in 2022.
A balancing act
The RBA governor acknowledged that it was now a delicate balancing act for the central bank to try and control inflation without causing the economy to stall. He said: “There is a path there to have inflation come down without the economy having too much pain, but it’s a narrow path.”
He also spoke about the dangers of ‘inflation psychology’ and how it could cause issues due to ongoing price and wage increases, which would mean dramatically higher interest rates. Mr Lowe said there were already cases where businesses were increasing prices leading to employees demanding pay increases.
He stated, “So there’s a shift in the inflation psychology of the country, and it’s not really showing up in the survey-based measures of inflation expectations. If people start to worry that we can’t chart that credible path back, then I think the shift in psychology could be quite persistent, and we know where that ends. It ends in persistent inflation, and then you have to have much higher interest rates and the economic downturn to get inflation back down.”