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Reserve Bank governor Philip Lowe warns Australian inflation will rise to 7% by end of year 

Reserve Bank governor Philip Lowe has warned Australians to be prepared for higher interest rates, saying inflation needs to be brought under control.

In his first public appearance since the RBA raised cash interest rates by more than 50 basis points at last week’s board meeting, Dr. Lowe predicts inflation will rise to seven percent by the end of the year.

That compares with a current inflation rate of 5.1 percent.

‘That is a very high number and we must be able to map out a course to two to three percent.

Australians have been warned to be prepared for higher mortgage rates.  Pictured are houses in Melbourne

Australians have been warned to be prepared for higher mortgage rates. Pictured are houses in Melbourne

“I’m confident we can, but it will take time,” said Dr. Lowe Tuesday in a rare television interview on ABC’s 7:30 p.m.

“Because inflation was so high and interest rates so low, we felt it was important to take a decisive step to normalize monetary conditions and we did that at the last meeting.”

He said it’s reasonable to expect the cash rate to reach 2.5 percent at some point, but said this will be determined by events.

The out-of-pocket rate currently stands at 0.85 percent after the RBA raised it from a record low of 0.1 percent in successive board meetings.

Commonwealth Bank’s New Interest Rate Forecasts on RBA Cash Rates

JULY: 0.5 percentage point up to 1.35 percent

AUGUST: 0.25 percentage point up to 1.6 percent

SEPTEMBER: 0.25 percentage point up to 1.85 percent

NOVEMBER: 0.25 percentage point up to 2.1 percent

It wasn’t until last year that the RBA had expected to keep cash interest rates low through 2024, but Dr. Lowe said that was never a promise.

“The economy did not evolve as we expected. It was much more resilient and inflation was higher. We thought we should respond to that,” he said.

He said the economy is in remarkably good shape, with unemployment at its lowest point in 50 years, households that have built up financial buffers of about $250 billion and the number of people behind on their mortgage payments is declining.

His comments came as global stock markets are in turmoil, fearing that the US economy could plunge into recession if the Federal Reserve aggressively raises interest rates to address its own inflation problem.

US inflation is at 8.6 percent, the highest level in 40 years.

But dr. Lowe is confident that the Australian economy will continue to grow quite strongly over the next six to 12 months.

“There is still a recovery from all the Covid-19 restrictions, people are spending in a way they couldn’t last year,” he said.

dr. Lowe said there is a big backlog of construction work and the number of vacancies is very high.

“So people can trust that the jobs will be there and in that environment people will continue to spend,” he said.

The Commonwealth Bank, Australia’s largest mortgage lender, expects the RBA to raise interest rates four more times by Christmas.

It expects another 0.5 percentage point increase in July, the same as half a percentage point increase this month, the largest monthly increase since February 2000.

This would be followed by a 0.25 percentage point increase in August, September and November – bringing the spot rate to 2.1 percent – the largest since May 2015.

Reserve Bank governor Philip Lowe (pictured) said there is a significant backlog of construction work and the number of vacancies is very high.

Reserve Bank governor Philip Lowe (pictured) said there is a significant backlog of construction work and the number of vacancies is very high.

The 2.1 percent forecast was higher than the 1.6 percent forecast by the CBA earlier this year.

Federal Treasurer Jim Chalmers said “inflation will get worse before it gets better” and warned of significant financial stress in the coming months.

He blamed the previous coalition government for last week’s rate hike and said it was no use mincing words.

There is more pain in Australia where electricity prices will continue to rise along with rising interest rates and inflation.  Pictured is a power line in the outback of Queensland

There is more pain in Australia where electricity prices will continue to rise along with rising interest rates and inflation. Pictured is a power line in the outback of Queensland

“It is certainly a difficult period for many people. We’ve inherited this complete cost of living crisis, including rising interest rates,” he told ABC.

Mr Chalmers said the government’s priorities were medicine, childcare, bringing down energy bills over time and getting real wages back up.

“It is our job as a government to ensure that after some of this emergency aid runs out in the short term, it is replaced with responsible, sustainable support for the cost of living,” he told Seven News.

Why should interest rates go up?

The most fundamental principle of economics is supply and demand.

When supply exceeds demand, prices will fall, but when demand is high and supply is scarce, the cost of products will rise.

Therefore, something that is rare and sought after, such as gold, is expensive, while something that is abundant, such as potatoes, is relatively cheap.

This rule also applies to money itself.

Huge stimulus from the Australian government during the pandemic totaling more than a third of a trillion dollars – at a time of record low interest rates – has resulted in more money competing for the same amount of goods and services.

The extra supply of cash is now driving prices up (along with a range of other factors, including the war in Ukraine and supply chain chaos during the pandemic).

But by raising the cash interest rate and making it harder to borrow money, it should limit the money supply and help lower prices.

Cold consolation for those forced to pay more on their mortgage.

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