Australia’s next interest rate hike could be halved from the usual trend of 50 basis points as property prices dip by at least 10 per cent, the governor of the Reserve Bank of Australia has hinted at in a recent speech.
Addressing a parliamentary standing committee on economics, Governor Philip Lowe said that while further hikes to the cash rate are “required”, it will be necessary to slow the speed and size of those hikes.
He said while the RBA was not on a “pre-set path”, it was committed to doing whatever was necessary to bring Australia’s inflation rate back down to between two and three per cent.
“I know that higher interest rates are unwelcome for many people, especially those who have borrowed large sums over recent times,” Lowe told the committee.
“Higher interest rates are putting pressure on households, just at the time that higher petrol prices and grocery bills are squeezing budgets. So it is a difficult and a concerning time for some people.
“The alternative, though, of allowing higher inflation to become entrenched would be even more difficult and it would damage our economic prospects.”
Australia’s current inflation rate is 6.1 per cent, and the current cash rate target is 2.35 per cent, having been lifted by five consecutive hikes since May.
All bar one of those hikes was by 50 basis points – or 0.5 per cent. Only the first hike in May was 25 basis points.
“At some point, we will obviously not be increasing rates by 50 basis points at each meeting, and we’re getting closer to that point,” Lowe said.
During questions Lowe said he anticipates Australia’s red-hot property market to retreat by as much as 10 per cent as higher interest rates and inflation clamp down on the public’s willingness to commit to large mortgages.
“House prices went up 25 per cent over the past two years. A very, very big increase,” he said.
“It’s not a forecast, but it would not surprise me if prices came down by a cumulative 10 per cent.
“And even if they did, that is still up 15 per cent over three years.”
Lowe and the entirety of the RBA have been frequently criticised in recent months as leading house buyers into a false sense of security that interest rates would not rise until 2024.
He told the committee that he never made that promise – and any statement on the movement of the cash rate target was wholly dependent on the latest economic data.
“I am frequently reminded that many people interpreted our previous communication as a promise, or a commitment, that interest rates wouldn’t rise until 2024,” he said.
“This was despite our statements on interest rates always being conditional on the state of the economy. This conditionality often got lost in the messaging.
“We are currently working through the implications of this for our future approach to forward guidance and communication more generally.”
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