Australia’s central bank Governor Philip Lowe resolved to keep fighting inflation in first public appearance of the year, pushing back against critics of aggressive interest-rate increases and pledging to see out his term.
(Bloomberg) — Australia’s central bank Governor Philip Lowe resolved to keep fighting inflation in first public appearance of the year, pushing back against critics of aggressive interest-rate increases and pledging to see out his term.
Lowe, speaking before a senate panel that included representatives of minority parties, acknowledged a rising tide of criticism of the Reserve Bank, while writing off much of it as “noise” that comes with any tightening cycle.
“We want to get inflation down because it’s dangerous,” the governor told lawmakers Wednesday in Parliament House, Canberra. “It’s corrosive, it hurts people, it damages income inequality and it if stays high it leads to higher interest rates and more unemployment.”
The hour-and-a-half sitting was a preview for Friday’s semi-annual testimony when the governor faces questions from a lower house committee whose members have strong economic credentials. Its chairman has a PhD in economics and taught and studied at Yale University, while another was senior economic adviser to the prime minister during the 2008-09 financial crisis.
“I thought he did well,” Diana Mousina, senior economist at AMP Capital Markets, said of Lowe. She referred in particular to how the governor handled a question over a private lunch he attended with rates traders after last week’s policy meeting that sparked widespread criticism.
“That was probably the hard question,” she said. “It was a good explanation.”
Lowe will try to use his two appearances in parliament to defuse criticism leveled at him over recent decisions, in particular over poor communications.
This came most recently at the Feb. 7 meeting, when the RBA raised rates, as expected, but the governor surprisingly added that further increases were expected in months ahead. That sparked outrage in some media outlets, coming after nine straight hikes and hopes the tightening cycle was near its end.
The statement also drew a chiding from one of Lowe’s predecessors. It would be better to be “cautious and prudent” in the language used to forecast future rate movements, said former Governor Bernie Fraser, who headed the bank from 1989-1996.
Lowe said Wednesday the RBA’s nine-member board had an open mind on the policy outlook.
“It will depend upon inflation data, resilience, spending, and what’s happening with wages,” he said. “I don’t think we’re at the peak yet but but how far they need to go, we’re still unsure.”
The RBA has hiked by 3.25 percentage points since May to tackle inflation that has buffeted economies across the developed world. Data overnight showed US consumer prices rose briskly in January, potentially pushing the Federal Reserve to take rates higher than anticipated.
Australia’s consumer prices soared 7.8% in the final three months of 2022 and the central bank forecasts inflation won’t ease back to the top of its 2-3% target until mid-2025.
RBA senate hearings are punctuated by unconventional ideas from politicians from rural and environmental parties. The Greens senator accused Lowe of trying to “smash” the economy into recession and has urged last week’s rate hike be reversed.
Lowe rejected the recession assertion, saying policymakers “want to preserve” recent employment gains and are navigating a “narrow path” of trying to bring down inflation without damaging the economy.
“It’s not guaranteed but there’s a chance we can do it,” he said.
Money markets currently reckon the RBA will hike three more times this year to 4.1% by August, from 3.35% at present, while economists’ median estimate is a 3.85% terminal rate.
Another senator at today’s hearing is concerned about Australia’s gold holdings and insists the Bank of England has been tampering with them. He rejected an RBA audit, suggesting there might be collusion between central banks.
The senator also suggested that higher rates were contributing to hotter inflation by driving up mortgage costs.
The governor comfortably parried most questions from the senators who focused heavily on politics. The challenge increases markedly on Friday when he faces three hours of probing by lawmakers who are likely to question his economic assumptions.
At the heart of Lowe’s discomfort is that Australia has among the highest household debt in the developed world and given most borrowers are on variable rates, each hike hits quickly.
Lowe was again confronted over his pandemic-era guidance that suggested rates wouldn’t rise until 2024, a pledge abandoned as inflation surged. The governor pushed back against calls from the Greens for him to resign.
“I have a seven-year term as the governor of the bank and I intend to serve out that term,” he said. “I think it would be a very bad outcome for the board to have to resign.”
–With assistance from Victoria Batchelor.
(Adds comment from economist.)
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