RBA governor Phil Lowe gave his annual speech at the Anika Foundation today.

While there were few surprises in his assessment of the economy and the impact of Delta, Lowe caught the attention of analysts with some more pointed comments on the outlook for interest rates.

As Australia’s economy has emerged from the pandemic, the RBA has held steadfast to its view that benchmark interest rates won’t rise until 2024.

The revised outlook for interest rates follows on from the paradigm shift in global central banking, where the focus shifted to a sustained uplift in actual inflation (rather than forecast inflation).

Lowe rates?

Australia’s economy has rebounded well in many areas, but Lowe says Australia’s labour market will still need to “tighten considerably” before wage growth starts rising consistently.

The central bank’s view is that wage growth will need to climb above 3% before inflation pressures become entrenched.

“Our judgement is that it will take some time for wage increases to lift to a rate that is consistent with achieving the inflation target,” Lowe said.

But he also noted that market pricing indicates investors disagree.

Right now, the Overnight Indexed Swap (OIS) curve — a common metric to determine the implied cash rate — is priced for rates to rise to 0.25% by the end of this year.

Rates are then priced to climb to 0.6% in 2023, before continuing higher to 1% in 2024.

But in some fairly direct commentary, Lowe pushed back against that idea today.

He said based on the RBA’s wage growth forecasts, the current market pricing is “difficult to reconcile”.

“I find it difficult to understand why rate rises are being priced in next year or early 2023,” Lowe said.

“While policy rates might be increased in other countries over this timeframe, our wage and inflation experience is quite different.”

UBS said Lowe’s comments put him on the “dovish side” of market expectations, as well as other global central banks.

The Australian dollar lost ground against all the major currencies following Lowe’s speech


The other part of today’s speech that got analysts talking was Lowe’s discussion of house prices.

He framed his comments around the argument that the RBA should consider the use of monetary policy (higher rates) to cool Australia’s red-hot property market.

But on this topic as well, he was also fairly direct; “I want to be clear that this is not on our agenda,” Lowe said.

He acknowledged that higher rates would indeed bring house prices lower, but said it would also come at the cost of jobs and wage growth.

He also acknowledged that “monetary policy is contributing to higher housing prices at the moment”.

But the solution to ever-higher prices lies in the enactment of policy measures that fall outside the scope of the central bank, Lowe said.

More specifically, those policies should target the cost of land on which dwellings are built, he said.

He cited planning and zoning changes, improved transport infrastructure, and taxation changes as examples of changes that can help bring the market into equilibrium.

For now though, equity investors can’t be faulted for basing their investment decisions on the assumption that rates won’t be climbing off rock-bottom any time before 2024.