Former Reserve Bank of Australia (RBA) governor Glenn Stevens has cautioned that Australia could face an extended period of high interest rates. His remarks come as the RBA struggles to tame inflation while balancing the potential threats to the economy.
High Interest Rates: A New Economic Era?
Speaking at the Australian Petroleum Production and Exploration Association (APPEA) conference, Stevens drew attention to the end of the low-rate era. He warned that it is unlikely that interest rates will drop significantly from current levels.
“Inflation is still way too high,” Stevens asserted. “Central banks are in a once-in-a-generation battle to return inflation to the very low and stable levels they were at; it was such a strong foundation of the preceding several decades of prosperity.”
He further suggested that we may have transitioned from an era of prolonged low interest rates to one where they could remain high for some time. “Not necessarily that much higher than now, but I think a return to the ultra-low rates that we saw for a while there is unlikely,” he noted.
Interest Rates and Inflation: A Delicate Balance
The RBA has been grappling with the delicate task of managing inflation. Its board decided to raise the cash rate to 3.85% in May, following a pause in April to assess the impact of the previous 10 consecutive hikes.
However, the decision to raise the rates was another close call, as the board grappled with arguments for and against the move. The decision ultimately tipped towards a rate hike due to concerns about inflation pressures such as rising rent prices due to a recent migration influx, a strong jobs market, weak productivity growth, and a rising rate of services inflation.
Furthermore, the housing market’s rapid recovery and a fall in the Australian dollar were seen as indicators supporting a rate hike. Despite this, the board maintained that the forecasts for future cash rates were predicated on one further increase.
Stevens’ cautionary words about high inflation are echoed in the RBA’s May minutes, forecasting that inflation won’t peak until at least mid-2025. This means another two years of potential rate rises as the board tries to navigate uncertain economic conditions.
Impact on Households and Businesses
The RBA’s rate hikes have sparked concerns about the potential economic downturn. The Westpac-Melbourne Institute Consumer Sentiment Index plunged 7.9% this month, indicating growing pessimism about personal finances and the economy among households.
The sentiment was particularly weak among those surveyed after the budget, with 27% expecting to be worse off. Moreover, the fear of further rate rises has escalated among consumers. “Nearly 70% expect a further rise in variable mortgage rates over the next 12 months, with just over 40% expecting them to rise by 1 percentage point or more,” said Westpac’s chief economist Bill Evans.
The financial pressure on households is also evident in the home loan market. Ratecity.com.au found that the consecutive rate rises have left some borrowers with as little as $57 per day after mortgage repayments.
The Road Ahead
The current economic conditions have provoked strong reactions from various sectors. Warren Reynolds, executive director of Muzz Buzz, criticized the RBA’s policy, suggesting that it could edge the Australian economy towards a recession.
However, Stevens lauded the government for returning to a balanced budget, the first in 15 years. While acknowledging the role of strong growth and high commodity prices in achieving this, he praised the government for allowing most of the windfall gain to flow through to the bottom line.
As the RBA meets again on June 6, the stage is set for further discussions and decisions about Australia’s economic
A finance geek with over 20 years of experience, Joseph Bancroft, known as Joe, is the Chief Editor at Money News Biz. He's an acclaimed author, blogger, speaker, and mentor, with a knack for forecasting economic trends and identifying investment opportunities. Joe blends professional acumen with a quirky charm, making him a respected and engaging figure in the finance industry.