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Prime Minister Scott Morrison’s warning that interest rates could be higher without the Coalition in power has been hosed down by Reserve Bank of Australia governor Philip Lowe, who is firm the cash rate is likely to remain at the record low 0.1 per cent until 2024.
Channelling former prime minister John Howard, Mr Morrison this week said the inflation spike seen in the United States should serve as a warning about what could happen in Australia, and local interest rates and the cost of living would be higher than needed under Labor.
But Dr Lowe said inflationary pressures had been “more muted” here than in other countries, and the cash rate would likely only rise once annual wage growth was above 3 per cent.
The last time annual wage growth was running at that level was March 2013, and Dr Lowe said the “probability” of reversing a decades-long decline in wages growth in just six months was “very, very low”.
The RBA has for months sounded a more cautious note on inflation despite financial markets, consumer expectations and now the Prime Minister taking a more bullish outlook, but Dr Lowe’s message was blunt.
Markets are pricing in between three and four rate hikes by the end of 2022. The RBA governor said the economic data did not warrant that outlook.
“If you think wages are going to go from 2 per cent to 3.5 or something in six months, well, maybe the market’s right, and we’re wrong,” he said in a speech to a group of business economists in Sydney on Tuesday.
When asked on Tuesday the basis for Mr Morrison’s claim interest rates would rise under Labor, Finance Minister Simon Birmingham responded that people needed only to look at history.
“They’ve seen the history of Labor governments where interest rates have been higher, where electricity prices have been higher, where economic outcomes have been weaker,” Senator Birmingham said.
Labor’s treasury spokesman, Jim Chalmers, hit back that real wages had gone backwards under the Coalition, while the RBA noted petrol prices had increased 24 per cent over the past 12 months.
“Petrol prices have skyrocketed on his watch. Is he now seriously claiming that he has a policy to keep petrol prices down?” Mr Chalmers said. “Well, then let’s hear it.
“Is he seriously claiming interest rates will not rise if he is re-elected? Let’s hear about how he intends to do that and how he intends to promise that.”
Dr Lowe reiterated his view that global current price pressures were transitory. However, he did warn the cash rate would eventually need to rise from the current record low 0.1 per cent to the neutral level of about 2.5 per cent.
“We’re trying to get interest rates up over time,” he said. “We’re in no hurry, we’re patient. But if we’re successful interest rates will go up and people who are borrowing today need to remember that.”
ANZ head of Australian economics David Plank said 2.5 per cent was higher than what many market commentators were thinking. “Certainly, we think a world of very high debt levels is likely to be one in which real rates are structurally low,” he said.
