Philip Lowe will cop plenty of heat for a surprise rate rise. But he’ll be eager to see next week’s budget do its bit to tame inflation, too.
Reserve Bank governor Philip Lowe must be a glutton for punishment. Having been criticised for suggesting that interest rates could remain on hold, then castigated for the fastest rate-tightening cycle in history and undermined by the recent review of the RBA, Lowe hasAlthough it was seen as possible that the RBA would raise the official cash rate by 0.25 of a percentage point to 3.
Lowe “remains alert to the risk that expectations of ongoing high inflation contribute to larger increases in both prices and wages, especially given the limited spare capacity in the economy and the historically low rate of unemployment”.The RBA is confident that medium-term inflation expectations remain anchored, but Lowe’s warning that further rate increases are possible shows he’s justifiably eager to ensure they stay that way.
We’re still a fair way from the former – real interest rates still sit at a negative 3 per cent – but no doubt Lowe will expect a visceral reaction to this decision, particularly given the lagged way higher rates are passed through to mortgage holders, meaning it will be months before borrowers stop feeling the impact of tightening.
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