Appearing before the Senate select committee on the cost of living on Wednesday (1 February), head of economic analysis at the Reserve Bank of Australia (RBA) Marion Kohler reaffirmed the central bank’s monetary policy stance despite apparent changes in market conditions.
In her opening statement, Ms Kohler revealed the central bank would revise its economic outlook next week, but stressed a revision to its monetary policy strategy was not in the offing, despite acknowledging a peak in inflation at the end of 2022.
She conceded higher interest rates, coupled with above target inflation, was compounding cost of living pressures, but claimed a softening of monetary policy would be premature.
“Inflation comes from demand and supply being imbalanced and interest rates work by reducing that demand and, therefore, getting demand and supply into a more sustainable balance,” Ms Kohler told committee members.
“…Inflation is still high, high interest rates are needed for the more sustainable balance to help return [inflation to target].
“We are aware that this is making it difficult for a number of households but the judgment is also that having higher inflation for longer is inflicting even more pain.”
Ms Kohler’s remarks come less than a week ahead of the RBA’s next monetary policy board meeting, scheduled for Tuesday, 7 February.
Markets are expecting the central bank to lift rates by a further 25 bps this month, taking the cash rate to 3.35 per cent.
However, sentiment is mixed regarding the length of the RBA’s monetary policy tightening cycle.
Deutsche Bank economist Phil O’Donaghoe has projected the cash rate to peak at 4.1 per cent in August, but others, including AMP Capital chief economist Shane Oliver, have claimed interest rates are nearing their peak.
According to Mr Oliver, lifting the cash rate to 4.1 per cent would intensify mortgage stress and prolong the downturn in the housing market amid a rise in distressed sales.
“The RBA has already raised rates by more than the 2.5 per cent interest rate serviceability buffer that applied up to October 2021,” he observed.
“In this scenario, home prices could fall by around 30 per cent from their high.”
The AMP economist has touted the possibility of rate cuts at the end of 2023, aimed at stimulating growth following a high interest rate-induced slowdown in economic activity.
