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Central Bank Governor Lowe doubles down on Interest Rates before Lawmakers
RBA Governor Lowe faced a Senate committee and reaffirmed the policy and direction he has taken the Australian Central Bank on so far
Earlier this morning, the Reserve Bank of Australia’s Governor Lowe sat before the Senate Economics Legislation Committee to provide insight into his war on inflation which has seen interest rates rise a painful 325 basis points in just 10 months.
However, he did not show up on an empty stomach. The Governor attended a private breakfast hosting top banks and interest rate traders where he heard their concerns on the Australian economy, a fact the committee was uncomfortable with. (maybe cause they weren’t RSVP’d)
The Governor retorted, outlining that he needed to talk with people and hear what the financial markets had to say. I’m sure a few mortgage owners would have some choice words.
However, apart from this response, the rest of the testimony was no Marvel movie. It was like any other senate testimony, tame and way too long. Although tame, there were some key themes Governor Lowe covered that require analysis to find value.
First, it is important to preface that Governor Lowe is serving a 7-year term as head of the Australian Central Bank, a sentence which will conclude in the middle of September this year. Therefore, it is safe to assume that his conduct over the next few months will no doubt cast a lasting picture of his legacy as a Central Bank Governor.
All the same, we looked at the testimony, so you don’t have to. Here’s what we found.
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I’m Not F#@ing leaving!!!
Like a high schooler being called into the principal’s office to explain themselves, Governor Lowe was also criticized for his overall response to his actions and responses between 2020-2022. Remember when the Reserve bank reassured us that rates wouldn’t increase before 2024? Well, the committee certainly remembered and was none too pleased.
The speed and intensity with which the Reserve bank tried to trip up markets by launching rates into the atmosphere are precisely the line of policy known as ‘Front loading’. A practice of hitting markets hard with contractionary policy to stave off a long-term crisis. If you haven’t already, you can read about it here.
Lowe defended his actions when asked why he should keep his job reinforcing the central bank’s policies and stated that such decisions were the collective responsibility of the nine-person board he chairs. Essentially, “It’s everyone’s fault, not just mine”. He affirmed that he would stay on till September.
Inflation is STILL an issue, and rate hikes aren’t going anywhere
He stated, “I don’t think we’re at the peak yet, but how far we have to go up, I don’t know,” he said. “It will depend upon inflation data, resilience, spending, and what’s happening with wages.”
When commenting on the fact that Inflation was at 7.8%, Lowe said it is “way too high” and needs to reduce.
Speaking of Data, it will be worth mentioning that the Australian Unemployment figures will be released tomorrow morning, with markets expecting them to remain in line with previous months’ figures at 3.5%. The Reserve Bank is forecasting an unemployment rate of 4.5% next year, which Lowe believes would put Australia on track to bring inflation down to 3%.
The crumbs of data such as Unemployment, Wage growth, CPI, and Housing prices are all key indicators to help you ascertain what the rate should be like every month. They ultimately feed one another, and you can gauge an unknown factor by understanding a known one.
His view that rate hikes are certain reflects our view too. We estimate that the RBA will continue to increase rates until late Q2 – Q3 and then start to taper off when many mortgages switch from fixed to variable rates. JP Morgan disagrees, saying that rates will soften beginning of next year. (Do with that what you may).
Do I need to take out another mortgage to pay off my rent?
While Lowe acknowledged that rising interest rates allow landlords to pass on this increase to their tenants, he made a counter-argument saying the main reason your rent is too high is not because of the RBA; it’s because of the Housing Vacancy rate at record lows of 1.2%. It’s the byproduct of a severe supply and demand imbalance fed by a booming immigrant & real estate market. Tell that to your landlord the next time he bumps your rent. (not financial advice).
Ultimately, this was a relatively subdued affair which was different from the focused analysis we usually do. It zoomed out and took a general look at the Reserve Bank. However, the testimony paints a picture and affirms our position for some time. The Central Bank is around halfway through its warpath. They must curb inflation and, incidentally, the employment, mortgage stability, and wage growth of most Australians within the firing line.
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