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Lowe’s forward guidance surprises, economists lift rate expectations

7 minute read

While the RBA’s 25 basis point hike was anticipated, Philip Lowe’s forward guidance has surprised some economists.  

The Reserve Bank of Australia (RBA) has indicated that it will persist with its tightening cycle in the coming months, building on the 325 basis points (bps) of rate hikes announced to date.

Following the central bank’s decision to hike rates by 25 bps in February, its first decision of the year, RBA governor Philip Lowe confirmed that the board’s main priority is to return inflation to target.

“The board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary,” Dr Lowe said. 


“In assessing how much further interest rates need to increase, the board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market,” he added. 

Within minutes of the bank’s announcement, CBA said it has amended its central scenario and now expects further 25 bps rate hikes at both the March and April board meetings for a peak in the cash rate of 3.85 per cent.

This, economist Gareth Aird said, will take monetary policy into “deeply restrictive territory”.

CBA’s quick reaction was sparked by Dr Lowe’s removal of the words “not on a pre-set path” from Tuesday’s statement — words that have appeared in almost all of the governor’s previous post-decision communication. 

“This change implies that the RBA board has essentially made up their mind and intend to raise the cash rate further over coming months, if the economic data prints in line with their updated forecasts,” Mr Aird said. 

“The Q4 22 inflation report has caused the board to shift their stance today. Other data has not printed stronger than their expectations … To be clear, we do not share those same concerns. We believe that the RBA’s 300 bps of rate hikes between the May and December 2022 board meetings had very little impact on price changes in the economy over 2022,” the economist opined. 

But, Mr Aird noted, the CBA’s job is to call what it thinks the RBA will do and not what it thinks it should do.  

“As such, we now expect the RBA board to raise the cash rate by a further 25 bps at both the March and April board meetings. This would take the cash rate to 3.85 per cent,” Mr Aird said, adding that, as a consequence, the bank now expects the economy to slow considerably over 2023. 

“We think that the RBA is underestimating the lagged impact that the already delivered interest rate hikes will have on the economy in 2023,” Mr Aird cautioned. 

Also commenting on the RBA’s latest decision, AMP’s Shane Oliver said that another rate hike now looks likely next month, but he noted that the bank’s commentary is not necessarily a great guide to what happens with rates.

“Just a bit more than a year ago, it didn’t expect rates to start rising until 2024 at the earliest,” Dr Oliver said. 

“Given the experience of the last year, one has to be humble in trying to predict the cash rate peak. Prior to the December quarter CPI release, we thought the RBA would leave rates on hold at this month’s meeting! And some argue there are still many hikes ahead of us. So, it’s worth considering both sides of the argument.”

And on the other side of the argument, HSBC’s Paul Bloxham referred to governor Lowe’s statement as “plain vanilla”.

The chief economist said the statement “did not introduce many new elements, despite the fact that two months had elapsed since the RBA board last met”.

However, Mr Bloxham confirmed that HSBC’s expectations haven’t changed in that the RBA was predicted to continue to lift its cash rate by 25 bps a month until both inflation has clearly peaked and the unemployment rate has clearly troughed. 

“As we see Q4 2022 as the peak in inflation and expect that the unemployment rate is nearing its trough, we expect the RBA to pause soon, but not quite yet,” he said.

RBA previews inflation expectations

Last month, the Australian Bureau of Statistics (ABS) reported that consumer price index (CPI) inflation over the year to December was 7.8 per cent, the highest level since 1990. Underlying inflation, the RBA’s preferred measure, came in higher than expected at 6.9 per cent.

Previewing the RBA’s latest economic forecasts, which will be released in full in its quarterly statement of monetary policy on Friday, the RBA governor noted that inflation is expected to decline this year due to both global factors and slower growth in domestic demand. 

“The central forecast is for CPI inflation to decline to 4.75 per cent this year and to around 3 per cent by mid-2025. Medium-term inflation expectations remain well anchored, and it is important that this remains the case,” he said.

The RBA’s central forecast for the Australian economy is “little changed” compared to three months ago, with GDP growth expected to slow to around 1.5 per cent over 2023 and 2024.

Australia’s unemployment rate, which held at 3.5 per cent in December last year, is expected by the RBA to increase to 3.75 per cent by the end of 2023 and 4.5 per cent by mid-2025.

“Job vacancies and job ads are both at very high levels, but have declined a little recently. Many firms continue to experience difficulty hiring workers, although some report a recent easing in labour shortages. As economic growth slows, unemployment is expected to increase,” said Dr Lowe.

Reacting to the latest rate hike in Parliament on Tuesday, Treasurer Jim Chalmers once again distanced the government from the bank’s latest decision. 

In flagging the impacts increases to date have had on the Australian economy and its populace, Mr Chalmers said: “I think we understand, in this place, certainly the Australian community understands, that the Reserve Bank makes these decisions independently and it’s not our job in this place to interfere or to second guess their decision making or to pressure them in any way.” 

“It’s our job to focus on the broader pressures that are coming at us from around the world and being felt around the kitchen tables of this country.”

The government’s plans to address the high levels of inflation, Dr Chalmers said, include delivering responsible cost-of-living relief in a way that doesn’t add to the inflation challenge, dealing with issues in supply chains and the workforce, and showing spending restraint.

“Inflation is unacceptably high; there’s no use pretending otherwise. It will hang around for longer than we’d like, but there’s growing evidence that inflation is expected to have peaked in our economy and is now beginning to moderate,” he said.

“Our job, the responsibility that we take, is to do what we can to address these inflationary pressures in our economy and to take the pressure off Australians where we responsibly can.”

Lowe’s forward guidance surprises, economists lift rate expectations

While the RBA’s 25 basis point hike was anticipated, Philip Lowe’s forward guidance has surprised some economists.  

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Jon Bragg

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.

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