The Reserve Bank of Australia (RBA) has held fast to its monetary policy tightening strategy despite conceding inflation has passed its peak.
Appearing before the Senate select committee on the cost of living on Wednesday (1 February), RBA head of economic analysis, Marion Kohler, reaffirmed the central bank’s monetary policy stance despite apparent changes in market conditions.
In her opening statement, Kohler revealed the central bank would revise its economic outlook next week, but stressed a revision to its monetary policy strategy was not in the offing, despite acknowledging a peak in inflation at the end of 2022.
She conceded higher interest rates, coupled with above target inflation, was compounding cost of living pressures, but claimed a softening of monetary policy would be premature.
“Inflation comes from demand and supply being imbalanced and interest rates work by reducing that demand and, therefore, getting demand and supply into a more sustainable balance,” Kohler told committee members.
“…Inflation is still high, high interest rates are needed for the more sustainable balance to help return [inflation to target].
“We are aware that this is making it difficult for a number of households but the judgment is also that having higher inflation for longer is inflicting even more pain.”
Her remarks came less than a week ahead of the RBA’s next monetary policy board meeting, scheduled for 7 February.
Markets were expecting the central bank to lift rates by a further 25bps this month, taking the cash rate to 3.35%.
However, sentiment was mixed regarding the length of the RBA’s monetary policy tightening cycle.
Deutsche Bank economist Phil O’Donaghoe projected the cash rate to peak at 4.1% in August, but others, including AMP Capital chief economist, Shane Oliver, claimed interest rates were nearing their peak.
According to Oliver, lifting the cash rate to 4.1% would intensify mortgage stress, and prolong the downturn in the housing market amid a rise in distressed sales.
“The RBA has already raised rates by more than the 2.5% interest rate serviceability buffer that applied up to October 2021,” he observed.
“In this scenario home prices could fall by around 30% from their high.”
The AMP economist touted the possibility of rate cuts at the end of 2023, aimed at stimulating growth following a high interest rate-induced slowdown in economic activity.
