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Serious questions for the RBA as rate rises beckon

·5-min read
Reserve Bank governor Philip Lowe with his hand on his chin in a considered pose.
RBA governor Philip Lowe has some hard questions to answer. (Source: Getty)

When Philip Lowe addresses the National Press Club on Wednesday, it will be a great opportunity for the Reserve Bank (RBA) governor to continue to present his more enlightening insights on the economy and the future of interest rates.

We are almost certain to hear about the current inflation risks and all things relevant to having monetary policy settings in place that will sustain the economy on the path to full employment and to have inflation sustainably within the 2 to 3 per cent target band.

In recent times, Dr Lowe has provided some excellent insights into the way the bank sees risks and pressures in the economy, with some of his best commentary occurring when answering questions from market economists and the media.

Also from Stephen Koukoulas:

At the Press Club, there is a chance for some more probing questions for Dr Lowe which are all the more important given the recent news of the breakout of inflation and because the labour market is getting very close to full employment.

Some of the questions will depend on what Dr Lowe says in his set piece speech and, indeed, in his media release tomorrow when the outcome of the monthly board meeting will be revealed.

That said, the question-and-answer session should be an opportunity to test the RBA governor on a range of policy issues, especially in light of the central bank’s earlier missteps in hitting its inflation and full-employment targets.

Here are a few questions the governor should be asked or, at the very least, should address in his speeches:

  • Will the first few interest rate hikes in this upcoming cycle have a relatively small impact on the household sector given so many mortgage holders are so far ahead in their repayment schedule? For example, those who took out mortgages two or more years ago who maintained the dollar value of their repayments are well ahead and will not have to increase their monthly mortgage repayments for the first 50 to 100 basis points of hikes, given their payment schedules have, implicitly, a mortgage rate higher than they are paying today. Does this mean the cash rate may need to rise to 3 per cent or so to move to a neutral stance?

  • With household savings booming during the pandemic, will rate hikes have less restraining effect on the economy given the income boost to savers as interest rates rise? (Acknowledging, of course, that debt is higher than savings, so interest rate hikes are overall dampening influences on inflation.)

  • You noted your pragmatism adjusting the bank’s forecasts and policy biases as new data emerges. This is obviously a good thing. In a scenario that - by the way has a strong probability of unfolding - by the time of the May Board meeting, the headline inflation rate is 4 per cent, underlying inflation is 3.25 per cent, the unemployment rate is near 4 per cent and private sector wages growth is 3 per cent and accelerating, plus the near certainty of a mass of rate hikes from around much of the world, would you hike interest rates in May?

  • The RBA has a proud record of independence. It has in the past adjusted interest rates without fear or favour, including in the past during the heat of an election campaign. Will you give a commitment that if the facts demand an interest rate hike before polling day, you will continue that policy resolve and hike rates irrespective of the timing of the election?

  • While there is clearly a structural link between wages growth and inflation, the relationship can sometimes break down because of lags, structural changes in the labour market, productivity shortfalls and the like. Why have you elevated wages as a critical factor in your guidance on interest rates when it appears likely inflation will be ‘high’ and wages growth ‘moderate’ in the near term? In other words, if the board was dealing with a few quarters of underlying inflation of 3.5 to 4 per cent, with wages growth at 2.5 to 3 per cent, would you recommend tighter monetary policy?

  • It is fair to say zero immigration would be poor policy for both social and economic reasons, as would unfettered immigration, whatever that may look like. Suffice to say, there is some number in between for an ideal level of immigration for Australia - noting the makeup of humanitarian, family reunion and skilled migration are important subsets of what the ideal number might be. Pre-COVID, was immigration too high given the impact it has on house prices, wages and congestion? With there being an opportunity to reset the immigration policy, what sort of number would you like to see for the annual intake? Lower than the pre-COVID level?

  • You have been a massive advocate of all arms of policy working together to support economic growth and full employment, with inflation sustainably in the 2 to 3 per cent range. This was especially the case as the coronavirus hit the economy in 2020 and 2021. With the recovery now looking solid, inflation high and rising, and unemployment low and trending down, do you think the case for some fiscal tightening is now overwhelming, noting also that the return to a balanced budget is not likely on current policy settings and the risks point to a period of above-target inflation? Would a tightening in fiscal policy mean a lower peak for the cash rate in the upcoming monetary-policy-tightening cycle?

  • Are you wedded to returning the target for the official cash rate to quarter-point increments? That is, moves to 0.25 per cent, 0.5 per cent and the like? Or do you see virtue in moving in increments of 5 or 10 basis points if there is a little more uncertainty about the economic outlook?

No doubt there are many more worthy questions, but if the above issues are canvassed, it will add a lot to the economic policy debate as 2022 kicks off and business, householders and financial markets start getting used to higher interest rates.

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