Ahead of the US Federal Reserve’s decision and announcement on the size of the increase in its key indicator rate, Reserve Bank Governor Philip Lowe made the snap decision to do a rare public interview between bank board meetings.
The interview with Leigh Sales on the ABC’s 7.30 was surprising – both for the fact that the governor did it and the timing. It was Dr Lowe’s first public appearance since the RBA raised the cash rate by a larger than expected 0.50% at last week’s board meeting,
He forecast higher inflation, more interest rate rises but with strong expectation of solid economic growth out into 2023 and a still strong jobs market.
It was as though the Governor was seeking to reassure the country that despite the instability and volatility in financial markets, especially equities, that the underlying economic was OK, despite higher inflation and rates.
He told 7.30 that the economy is expected to grow strongly in the next six to 12 months.
The governor said he saw inflation hitting an annual rate of 7% in the final months of this year and then coming down quickly in early 2023, but taking a while to get back to the RBA’s 2% to 3% target range.
“With inflation being as high as it is, and with interest rates as low as they are, we thought it was important to take a decisive step to normalise monetary conditions and we did that at the last meeting.”
He said it is reasonable to expect the cash rate will get to 2.5% at some point, but said it will be driven by events.
The cash rate currently stands at 0.85% after rate rises at the last two RBA board meetings from a record low 0.1% which was in place from November, 2020.
Dr Lowe though was uncertain how high interest rates would have to go to get inflation lower, “… it’s unclear at the moment how far interest rates will need to go up to get that. I’m confident inflation will come down over time but we’ll have to have higher interest rates to get that outcome and how much higher remains to be determined.”
Dr Lowe said the 7% inflation estimate (it was 6% five weeks ago) is “a very high number and we need to be able to chart a course back to 2 to 3 per cent inflation. I’m confident that we can do that, but it’s going to take time”…“We’ll do what’s necessary to get inflation back to 2 to 3 per cent” … “We don’t need to get it back down straight away.”
“We’ve long had a flexible inflation target in Australia – we can look through the swings in inflation – but what we’ve got to do is make sure inflation comes back to 2 to 3 per cent.”
“The peak will be in the December quarter this year and by the time we get into the second half of next year, inflation will clearly be coming down, but in the first quarter, we’ll see lower rates of headline inflation.
“We’re expecting the Australian economy to continue to grow pretty strongly over the next six to 12 months. There’s still a bounce back from all the COVID restrictions. People are spending in a way that they weren’t able to do last year. People have got their savings that I’ve talked about to draw on and the current rate of saving is still quite high.
“Over the past couple of years people have put away an extra $250 billion – it’s a lot of money, and the saving rate is still high, and the number of people who’ve fallen behind in their mortgages is actually declining, not rising,” Dr Lowe told Ms Sales.
“So it’s quite plausible that saving patterns return to where they were before, so even if income growth is a bit weaker people have the financial capacity to keep spending.
“There’s a big backlog of construction work to be undertaken and the number of job vacancies is extraordinarily high, so people can be confident the jobs will be there and in that environment, people will keep spending.
“So there’s a lot of resilience in the household sector. At the individual level, some people have taken out loans that they may not have wanted to take in retrospect, but the overall picture, which is really very much the focus of the Reserve Bank, is of a pretty resilient economy.”
As late as the end of 2021, Dr Lowe and the RBA had been expecting to keep the cash rate low until 2024, but he said on Tuesday night that that was never a promise.
“The economy didn’t evolve as we expected. It’s been much more resilient and inflation has been higher. We thought we needed to respond to that,” he said.
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Meanwhile, two of the three major Wall Street measures ended lower for another day.
The key S&P 500 index dipped further into bear market territory as investors braced for further rate hikes from the Federal Reserve.
A bigger rise of 0.7% is now the tip from US analysts, commentators and business media, replacing the previous tip for a 0.50% rise.
Some analysts though think the Fed, after sending fear through markets with talk of a bigger than expected rise of 0.75%, will reveal a 0.50% increase, but all but promise a similar rise next meeting, thereby slipping in an effective 1% rise in rates, which might initially crush confidence, but could possibly provide some medium-term reassurance.
Tuesday saw the S&P 500 drop 0.38% to close at 3,735.48. The Dow lost 151.91 points, or 0.5%, to settle at 30,364.83. It was the fifth day of declines for the broad-market index and the 30-stock Dow. Nasdaq edged up 0.18% to finish at 10,828.35, but that was more of a bear market bounce and not taken seriously.
Gold and oil dipped as well. Comex gold lost 1% to settle at $US1,813.50 an ounce. It edged lower to $US1,809 an ounce just after 8am, Sydney time.
US West Texas Intermediate crude dipped to settle at $US118.93 a barrel and then returned back over $US119 a barrel in early Asian trading.
The Aussie dollar continued to weaken, dropping to 68.77 US cents at 8am, Sydney time. That was down around half a cent on the day.
The overnight futures trading saw a 40 point loss for the ASX 200 when trading restarts at 10am.
