RBA to hike until economy breaks

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Reserve Bank of Australia governor Philip Lowe briefed members of parliament’s economics committee yesterday.

According to The AFR, Lowe told federal MPs that he had no tolerance for prolonged high inflation and would do whatever it took to bring it down, leaving them with no doubt that he is not done raising interest rates.

Lowe’s briefing was portrayed as negative by various sources that spoke with The AFR.

According to sources, the tone was noticeably more pessimistic due to a focus on the risks to meeting the Bank’s expected inflation and unemployment targets.

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Questions focused on whether Lowe’s previously stated “narrow path” to reducing inflation without sparking a severe economic contraction was achievable.

According to one source, Lowe seemed “not that confident” about walking his “narrow path” when all risk variables, such as a global slowdown, were considered.

“It was pretty pessimistic”, stated the source.

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“He stressed that he doesn’t have any tolerance for (high) inflation lasting for a long time, and he will do what he believes needs to be done”, the source said.

Meanwhile, businessman and Executive Chairman of Yellow Brick Road Home Loans, Mark Bouris, has urged the RBA not to hike rates further, claiming it would reap havoc on the economy and households.

“That means people start losing jobs, when they stop paying their home loans or in the case of other sorts of debt, they run into debt problems (and) small businesses start to go out of business”, Bouris told Sky News on Tuesday.

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“I believe the full effect of the rate increases seen to date is yet to manifest itself and think the RBA should be more patient and assess the slowing effect that the rate changes have already set in motion”.

Bouris added that the increases to interest rates to date are yet to hit many mortgage holders still on fixed rates, but will soon be on variable.

“However, once they roll off their current fixed rate, many thousands of borrowers are facing a rate increase from around 2% to potentially over 6%, increasing their minimum loan repayments by upwards of 65%”, he said.

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I agree with Bouris’ assessment. There is still a lot of tightening built in given huge volumes of cheap fixed rate mortgages are still to expire:

Fixed rate mortgage cliff

Moreover, the best way to fight inflation is not to whack the one-third of households with mortgages, but for the Albanese Government to lower gas and electricity prices by smashing the east coast gas cartel.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.