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Australian interest rates: how high and for how long?

By Graham Young - posted Tuesday, 21 February 2023


RBA Governor Philip Lowe was 12 in 1973 and in university in 1982, so his formative years as an economist were dominated by the crisis and the solution - tight money supply and micro-economic reform.

That makes it hard to understand how he missed the current crisis, stating as late as May 2021 that he didn't expect rates to rise before 2024 despite the massive inflationary pressures being baked in by the COVID measures.

It also makes it likely that he will go harder than anyone currently thinks on interest rates because one of the lessons that were taken from the stagflation era was that interest rates were not raised early enough or quickly enough.

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Having erred once, it's more likely that the governor will overreact on interest rates. Furthermore, his term ends in September and is unlikely to be renewed, so the next seven months will ultimately define his legacy and reputation.

The market consensus is for another 0.5 percent rise in rates to 3.85 percent. However, some predictions, such as one from Morgan Financial, are for cash rates to rise to as much as 4.85 percent.

Morgan's chief economist, Michael Knox, has an enviable record of forecasting and bases this figure on the current unemployment rate of 3.85 percent.

In Morgan's note on Feb. 7, the RBA board is quoted as saying: "The unemployment rate has been steady at around 3.5 percent over recent months, the lowest rate since 1974."

Morgans infers from this that the RBA sees the unemployment rate as inflationary and will act accordingly.

So government and consumers may be surprised at how high rates go. They may also be surprised at how long rates stay up.

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What if a "peak" is actually more like a "plateau"?

If the strategy of the government and consumers is to use reserves to survive until we get to the other side, they may be surprised by how long they have to "hold their breath," and this will have ultimately catastrophic effects on consumer confidence.

The treasurer doesn't expect a recession, but I wouldn't be so sure.

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This article was first published in The Epoch Times.



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About the Author

Graham Young is chief editor and the publisher of On Line Opinion. He is executive director of the Australian Institute for Progress, an Australian think tank based in Brisbane, and the publisher of On Line Opinion.

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