RBA rate rise: Why Lowe delivered the Christmas present no one wanted 16.12.

2022, 16:39

Business The economy Interest rates

OP I NI ON

Why the RBA delivered the Christmas

present no one wanted

Elizabeth Knight
Business columnist

December 6, 2022 — 4.38pm

The Reserve Bank of Australia must have realised the decision to raise rates in December
would brand it the Christmas Grinch. But in recent times the central bank has become quite
accustomed to its lack of popularity.

Within moments of the RBA releasing the decision to raise the cash rate again, a cast of
players from mortgage brokers to charities decried the move to double down on its inflation
fight with one last heave to rates before year’s end.

Those labouring under the weight of higher cost of living pressures were hoping for a
Christmas reprieve.

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RBA rate rise: Why Lowe delivered the Christmas present no one wanted 16.12.2022, 16:39

Merry Christmas from the RBA: Governor Philip Lowe.

This month the decision on rates wasn’t a done deal. In the days before the RBA announced
the move at 2.30pm on Tuesday, the market was fairly evenly split on the outcome. Just
under half were betting on the RBA keeping rates on hold – just over half put their money on
a quarter of a percentage point rise.

To the extent there is a consensus, it is that the RBA has done most of the heavy lifting on
interest rates.

The RBA could have waited until early next year to see what the Christmas period data
showed. But one thing the central bank governor, Philip Lowe, has taught Australians
recently is that he is a firm believer in insurance.

During COVID, this desire for “insurance” against economic calamity is why the RBA took
rates down to 0.1 per cent, mistakenly suggesting they would remain there for years.

Lowe recognises there are some early signs that the taming of inflation has started but the
signs are only tentative. Lowe will need solid empirical evidence, and this is yet to emerge.

He is clearly looking for “belt and braces” to ensure that the peak of inflation will be felt in
the December quarter and not drag on into next year.

In “economist speak”, the statement from the RBA will be viewed as less “hawkish” than

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RBA rate rise: Why Lowe delivered the Christmas present no one wanted 16.12.2022, 16:39

previous statements. In layman’s terms, it was less strident about the need for further
interest rate rises, which suggests there may not be too many more.

He is clearly looking for “belt and braces” to ensure that the

peak of inflation will be felt in the December quarter and not
drag on into next year.

But there is plenty of room for interpretation by economists.

The RBA closed its remarks with a comment that it “remained resolute in its determination”
to return inflation to the target range of between 2 per cent and 3 per cent. And it expects to
increase rates further to achieve that outcome given inflation is sitting at 6.9 per cent.

The question of how many rate rises are left before we hit the end of this tightening cycle,
and when this will be, is now what the market and economists will obsess over in the coming
weeks.

The rapid-fire rate rises have taken the cash rate to 3.1 per cent from 0.1 per cent in seven
months. Under normal circumstances this should have been enough to cut inflation off at
the knees. But these economic conditions are unusual.

In the first instance, many Australians have borrowed at very low fixed interest rates. And
the lion’s share of these rates don’t roll off until next year and some won’t require
renegotiation until 2024.

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RBA rate rise: Why Lowe delivered the Christmas present no one wanted 16.12.2022, 16:39

Household spending has so far been resilient in the face of rising interest rates and high inflation.
LOUISE KENNERLEY

Those borrowers are not feeling the pain of higher rates and can continue to consume goods
and services accordingly. This explains why spending has remained stubbornly high, despite
the rising costs of goods and services.

The direct impact of rising rates has been clear. Already this year home values have fallen
nationally by more than 6 per cent. Sydney home values are down 10.2 per cent since
peaking in January and Melbourne values are down 6.4 per cent since February.

The RBA says household spending is expected to slow over the period ahead although the
timing and extent of this slowdown is uncertain.

It also acknowledges that much of the inflationary pressure Australians are feeling has been
imported. There is nothing the RBA can do about that or the deteriorating international
economy.

It can only tread the narrow path of attempting to tame inflation and keep the local
economy growing. If successful, this will be Lowe’s Christmas present.

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