Former Reserve Bank of Australia governor Glenn Stevens has warned of continued interest rate rises as global economies continue to recover from the financial impacts of Covid-19.
Speaking at the Australian Petroleum Production and Exploration Association (APPEA) conference in Adelaide on Tuesday, Mr Stevens used a keynote speech to forecast the cash rate remaining high in the short-term, as the RBA struggles to reign in inflation.
“Inflation is still way too high, so it’s not surprising that central banks have continued to push rates higher over recent months, and have signalled a willingness to go higher still,” Mr Stevens told the room.
‘Inflation is still way too high,’ former RBA governor Glenn Stevens said at the APPEA conference in Adelaide on Tuesday. Picture: NCA NewsWire / Naomi Jellicoe
It follows the RBA’s May meeting at which the board raised the official cash rate by 25 basis points to 3.85 per cent.
It was the bank’s 11th rate rise in 12 meetings, a trend which only took a pause in April for the RBA to gather more data to see if its previous 10 consecutive hikes were having the intended effect.
“Central banks are in a once-in-a-generation battle to return inflation to the very low and stable levels they were at; it was such a strong foundation of the preceding several decades of prosperity,” said Mr Stevens, who was RBA governor from 2006 to 2016.
“I think we’ve also transitioned from a world in which interest rates were low for a long time to one in which they’ll be elevated for some time.
“Not necessarily that much higher than now, but I think a return to the ultra-low rates that we saw for a while there is unlikely.”
His comments come just hours after the minutes of the RBA’s May meeting were released on Tuesday, in which they forecast inflation won’t peak until at least mid-2025.
That means another two years of potential rate rises as the board tries to navigate uncertain economic conditions.
However, May’s minutes show the most recent hike was another close decision, with several arguments made to raise the cash rate, and a number of reasons to keep it on hold.
The RBA board’s minutes from its May meeting show the latest decision to raise rates was another lineball call. Picture: NCA NewsWire / Damian Shaw
Data released over the month prior to the May 2 meeting showed a tightening labour market, and significant inflationary pressures.
RBA board members noted their predictions were based on one further rate rise, and acted accordingly.
Their forecasts show inflation not reaching the top-end of their target band until mid-2025, which was consistent with forecasts from three months ago.
It means inflation will have been above-target for four years at that point.
The board acknowledged the upside risk that the prolonged period of heightened inflation would see a change in wage and price-setting behaviour.
This would make it difficult to get inflation back to target within “a reasonable time frame”, it was decided.
Western Australian businessman Warren Reynolds was critical of the RBA following their latest rate rise, and believes the rate hike regime is causing the Australian economy to be on the edge of recession.
“For the past 12 months businesses have been dealing with price increases across the board, raw materials, fuel, rents, and wages. At the heart of it all, is rising interest rates,” said the executive director of drive-through coffee franchise Muzz Buzz.
“I am seeing the continued impact on businesses from the farm gate, to suppliers, right through to fellow retailers.
“What the RBA is continuing to do to the community is nothing short of disgusting.
“You cannot keep ripping money out of people’s pockets, and expect they’ll be able to continue to spend as they usually would.”
The RBA, under current governor Philip Lowe, has now made 11 interest rate rises in 12 meetings. Picture: NCA NewsWire / Nikki Short
Meanwhile, home loan comparison website Ratecity.com.au modelling found the spate of rate rises is increasing financial stress on households, with some borrowers left with just $57 per day.
Their analysis shows “a single person on the average wage, who took out a new loan two years ago, and borrowed at capacity to do so, will have to shell out 54 per cent of their pre-tax income to meet their mortgage repayments when the May RBA hike takes effect.”
After tax, that works out to about 71 per cent of their take-home pay going to mortgage repayments, leaving them with $57 for a mountain of other bills.
“The majority of borrowers haven’t yet paid for their tenth RBA hike, but now have got the eleventh lined up right behind it, with the potential of a twelfth looming in the background,” said Ratecity’s research director Sally Tindall.
“In particular, many borrowers who stretched the budget to get into the property market in the last couple of years are now buckling under the weight of higher rates.
Reserve bank flags more rate risesPremier slams Reserve Bank’s role in cost-of-living crisis
“To add insult to injury, a lot of these borrowers can’t refinance because they no longer pass the banks’ serviceability tests at higher rates.”
The RBA board meets again on June 6.
Read related topics:Reserve Bank