RBA boss makes dire cash rate prediction

In a speech to the National Press Club in Sydney he warned the decision to hold rates steady at 3.6 per cent after 10 straight hikes did not mean homeowners’ problems were over.

He outlined three key factors that will determine the future of interest rate settings.

These were “the “outlook for the global economy, especially in light of the recent banking stresses in the United States and Switzerland”, the “strength of household consumption”, and how price- and wage-setting behaviour responds.

“The decision to hold rates steady this month does not imply that interest rate increases are over,’’ Dr Lowe warned.

“Indeed, the Board expects that some further tightening of monetary policy may well be needed to return inflation to target within a reasonable time frame. It decided, though, that it was prudent to hold rates steady this month to allow more time to assess the impact of the increases in interest rates to date and the economic outlook.

“The Board is conscious that monetary policy operates with a lag and that the full effect of the increases to date is yet to be felt. It is also conscious that there are significant economic uncertainties at the moment. Given these lags and uncertainties, the Board judged that, with monetary policy now in restrictive territory, it was time to hold interest rates steady and accumulate more information.”

“This approach is consistent with our practice in earlier interest rate cycles. In those earlier cycles, it was common for the Board to move interest rates multiple times, then wait for a while to assess the pulse of the economy, and move again if the situation warranted doing so. So, it is a return to that world.”

Dr Lowe insisted that while the increases have been unwelcomed by many people, they have been necessary to preserve price stability in Australia.

“If inflation expectations do increase, and wage and price setting behaviour responds to the higher inflation and interest rate response is required, and the more the prices and wages respond to a period of temporarily high inflation, the greater will be

the need for interest rates to respond,’’ he said.

“Situations is a little more complicated when the supply side issues are persistent leading to persistently higher price increases.