Philip Lowe warns rates could rise again

 

Patrick Durkin and John Kehoe

 

May 6, 2024 – 5.00am

 

https://www.afr.com/policy/economy/philip-lowe-warns-rates-could-rise-again-20240505-p5fozd

 

Former Reserve Bank of Australia governor Philip Lowe has joined former governor Glenn Stevens in warning the fight against inflation “isn’t done” and any upside surprises would “mean the case for increasing interest rates would mount”.

 

Governor Michele Bullock is expected to upgrade the bank’s near-term inflation forecasts and use more hawkish language about the possibility of further monetary policy tightening at the conclusion of a two-day board meeting on Tuesday, after an upside inflation surprise last quarter.

 

Money market investors are betting there is only about a 4 per cent chance of an immediate rate rise of 0.25 of a percentage point this week, with the chance rising later in the year.

 

But Dr Lowe told The Australian Financial Review: “I understand that most people hope the peak has been reached and it may well have, but it might not have.”

 

Speaking ahead of assuming the role of chairman of philanthropic investment manager Future Generation Australia on Tuesday, Dr Lowe said he was “very conscious of not making the life of my successor more difficult” but was also relieved to be allowed to “talk about anything I like” now.

 

“People have been asking me [about rates] through the course of the year and I’ve been reminding them there is still two-way risk,” Dr Lowe said.

 

‘Might not be peak’

Two months ago, the market was strongly pricing in interest rate cuts, Dr Lowe said.

 

“At the time I said, ‘well just hold on, there’s still two-way risk here’ and the job of getting inflation back to target isn’t done and a succession of upside surprises would mean the case for increasing interest rates would mount.

 

“We’ve had one upside surprise, the underlying inflation pressure in the economy is still there and getting back to 2.5 per cent sustainably is not yet guaranteed. So there still has to be two-way risk.”

 

The headline consumer price index increased 3.6 per cent in the 12 months to March, above the RBA’s indicative forecast of 3.5 per cent and above the target of 2.5 per cent which the central bank hopes to achieve in 2026.

 

The bank’s preferred measure of annual underlying inflation, which strips out the most volatile price movements, was 4 per cent in the March quarter compared to an expected 3.8 per cent.

 

Before the upside inflation surprise, Ms Bullock slightly softened the RBA’s outlook in March to a broadly neutral stance on whether rates could next go up or down.

 

“I’m worried about inflation,” Ms Bullock said on March 19.

 

“I still firmly believe that we are on a narrow path and there are risks on each side.”

 

On the next movement in interest rates being up or down, she said: “We’re in the position where I don’t want to say either way. It’s basically not ruling it in, not ruling it out.”

 

Since then, inflation for the March quarter came in stronger than expected, jeopardising the RBA’s forecast that it will moderate to 2.8 per cent by late 2025 and 2.6 per cent by mid-2026.

 

Fellow former RBA governor turned Macquarie Group chairman Mr Stevens said on Friday that “low inflation is not yet assured … and the prospects for interest rates are unclear”.

 

“What we really need to see is low inflation is secure.

 

“We’re on the path back there, it’s been going the right direction, but I’d say low inflation is probably not yet quite secure.

 

“And when it is secure, I think that will give a lot more certainty to the interest rate outlook and markets.”

 

Dr Lowe – who served as RBA governor from 2016 to 2023 – succeeds NSW former premier Mike Baird as chairman at Future Generation in his first board appointment since leaving the RBA last September, after 42 years at the central bank.

 

Future Generation Australia was founded by Geoff Wilson in 2014, and alongside its sister company Future General Global has invested $75.8 million in social impact partners and other not-for-profits with a focus on children, youth at risk and youth mental health.

 

Dr Lowe said he was playing more golf but expected to take on one more, listed, for-profit board role.

 

He said that, “as I view to my cost that often things turn out quite differently to what you expect”.

 

“I knew that lesson before [the pandemic] but that was one case where things turned out for the country much better than people were saying,” he said.

 

“People were talking about 15 per cent unemployment and temporary morgues being built across the Reserve Bank in the Domain because so many people would be dying and a vaccine not being developed for years and years, yet none of that happened.

 

“We wanted to guard against the really bad downside outcomes and we took out quite a lot of insurance against those outcomes, and it turned out that we didn’t need all that insurance.”

 

Dr Lowe copped political and public criticism for his pandemic-era guidance that the RBA believed low inflation would not be strong enough to raise interest rates until 2024. He ultimately lifted the cash rate from near zero in May 2022.

 

The RBA has increased the cash rate 13 times in this tightening cycle to 4.35 per cent.

 

Dr Lowe’s seven-year term ended in September last year, after federal treasurer Jim Chalmers declined to extend his tenure and installed Ms Bullock as the first female governor.