On Tuesday, Philip Lowe issued his final post-meeting statement as the governor of the Reserve Bank of Australia (RBA), revealing a third consecutive pause in the interest rate at 4.1 per cent.
In the statement, which delivered a parting gift to the Australian population, Dr Lowe painted a sombre picture of an uncertain future.
“The Australian economy is experiencing a period of below-trend growth and this is expected to continue for a while. High inflation is weighing on people’s real incomes and household consumption growth is weak, as is dwelling investment,” he said.
“Given that the economy and employment are forecast to grow below trend, the unemployment rate is expected to rise gradually to around 4.5 per cent late next year. Wages growth has picked up over the past year but is still consistent with the inflation target, provided that productivity growth picks up,” Dr Lowe continued.
He conceded that recent data – including August’s inflation figures – are consistent with inflation returning to the 2–3 per cent target range over the forecast horizon but added that “significant uncertainties around the outlook” remain.
“Services price inflation has been surprisingly persistent overseas and the same could occur in Australia. There are also uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages respond to the slower growth in the economy at a time when the labour market remains tight,” Dr Lowe said.
“The outlook for household consumption also remains uncertain, with many households experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers and higher interest income. And globally, there is increased uncertainty around the outlook for the Chinese economy due to ongoing stresses in the property market.”
As such, he reiterated a commonly used sentiment in noting that “further tightening of monetary policy may be required to ensure that inflation returns to target”.
But Dr Lowe will be absent at the helm at the RBA at its next meeting, with his seven-year tenure due to expire on 17 September. By the time October rolls around, it will be Michelle Bullock in his seat. And, according to Dr Lowe, Ms Bullock and the remainder of the RBA board will “continue to depend upon the data and the evolving assessment of risks”.
“In making its decisions, the board will continue to pay close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market. The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that,” he said.
Last month, the RBA’s meeting minutes revealed that board members do see a “credible path” back to the bank’s inflation target of 2–3 per cent without the need to lift the cash rate beyond 4.1 per cent.
“Members noted that the full effects of the earlier tightening were yet to be recorded in the data. Even so, consumption had already slowed significantly, there were early signs that the labour market might be at a turning point and inflation was heading in the right direction,” the RBA said at the time.
“Considering this and the forecasts, members observed that there was a credible path back to the inflation target with the cash rate staying at its present level.”
The overwhelming sentiment post-Tuesday is that the RBA is expected to leave interest rates on hold for the rest of this year ahead of rate cuts next year.
As such, Ms Bullock is expected to have a much easier run than Dr Lowe, unless of course inflation makes a resurgence and blemishes her tenure.
