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Outgoing Reserve Bank governor Philip Lowe has signalled interest rates could climb further, but it will depend on consumers’ response to the sharp tightening of monetary policy over the past year.
Lowe, making his last appearance before the House of Representatives’ economics committee before he is replaced by his deputy, Michele Bullock, next month, said there were encouraging signs that inflation was coming back towards the bank’s 2 to 3 per cent target band.
Outgoing RBA governor Philip Lowe, at his final appearance before estimates, warned against rent freezes. Credit: Alex Ellinghausen
The bank has lifted the official cash rate by 4 percentage points since May last year, the most aggressive tightening since the 1980s. Inflation has eased over the past six months but remains elevated at 6 per cent.
While unemployment remains around 3.5 per cent, both the RBA and the federal Treasury are expecting economic growth to slow. The bank is forecasting the economy to grow by just 0.9 per cent this year.
Lowe admitted it was a “complicated” situation at present, especially if inflation did not fall as quickly as expected.
“It is possible that some further tightening of monetary policy will be required to ensure that inflation returns to target within a reasonable timeframe. Whether or not this is the case will depend upon the data and the [bank] board’s evolving assessment of the outlook and risks,” he said.
“It is encouraging that the recent data are consistent with inflation returning to target over the next couple of years.
“The data are also consistent with the Australian economy continuing to travel along that narrow path that I have spoken about for some time – that path is one that leads to inflation coming down within a reasonable timeframe and the unemployment rate remaining below the levels of the past 40 years.”
The governor also weighed into the political fight over soaring rents, likening the idea of freezing rents to giving people more money to buy increasingly expensive houses.
Lowe said ultimately the best way to deal with high-priced rents was to boost housing supply.
Rents are growing at almost 10 per cent, prompting calls from the Greens for a freeze on rents and then a cap on rent increases.
National cabinet is due to meet next week when issues around the housing market will dominate.
Lowe said a rent freeze, while delivering short-term relief to renters, would actually act as a disincentive for the construction of more housing.
He said when house prices were climbing sharply, there were demands to give potential home buyers more money to enable them to buy into the market. A rent freeze would have a similar effect.
“They’re short-term fixes that both, in my judgment, make the situation worse,” he said.
“In most cases, rent controls reduce incentives to add to supply.”
Lowe said the best way to deal with rent inflation was to bring on more supply, urging local and state governments to deregulate zoning and planning regulation.
“The solution lies in increasing supply,” he said.
Answering a question from independent MP Allegra Spender about the nation’s most pressing productivity issues, Lowe started by saying more investment was needed in human capital.
He said the ability of Australians to deal with increasingly complex problems and a digital economy meant more investment in schools and universities was necessary.
But he added that competition policy and changes to land zoning were necessary. He said while people thought about the cost of a home in terms of bricks and mortar, it was actually the land beneath a home that was expensive.
“It’s the land. The land embedded in each dwelling is very expensive, perhaps the most expensive in the world,” he said.
Lowe said there were two substantial risks to the economic outlook.
Inflation for services could remain elevated for longer, which might require higher interest rates.
Reserve Bank governor Philip Lowe will be replaced next month by his current deputy Michele Bullock, the first woman to run the national bank. Credit: Alex Ellinghausen
The other risk was household spending which, though falling in real terms, was being held up by a strong jobs market. He said this could change quickly, especially if people started to feel the pinch of higher interest rates.
“The decline in real incomes and higher interest payments are squeezing the budgets of many households,” he said.
“While around 1 million borrowers have already transitioned from low fixed-rate loans to loans with higher interest rates, a similar number will make that transition over the next 18 months.”
Lowe said a key ongoing concern had been whether community expectations around the inflation rate remained “anchored” around the bank’s 2 to 3 per cent target.
He said at this stage there were no signs people were expecting inflation to remain elevated.
“At the moment, medium-term inflation expectations remain well anchored, which is positive,” he said.
“But the longer inflation stays high, the greater the likelihood that businesses and workers will come to doubt that inflation will return to target and, in response, they will adjust their behaviour.
“This would make the task of controlling inflation more difficult and likely lead to a sharper slowing in output and a greater loss of jobs.”
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