Reserve Bank warns it could return to 50 basis point interest rate increases

Reserve Bank warns it will return to super-sized rate hikes amid fears surging wages will push inflation to new heights

  • Reserve Bank has hinted it could return to super-sized interest rate increases
  • Governor Philip Lowe said RBA had not ruled out return to 50 basis point hikes
  • He warned of a ‘price-wage spiral’ as Labor pushes multi-employer bargaining

The Reserve Bank of Australia has warned it could return to super-sized interest rate hikes if a surge in wages pushes inflation to new 32-year highs.

Governor Philip Lowe hinted borrowers could cop 0.5 percentage point rate increases again, like they did in June, July, August and September, and raised concerns about a possible ‘price-wage spiral’.

‘Given our mandate for price stability and full employment, the board expects to increase interest rates further over the period ahead,’ he told a Melbourne dinner on Tuesday night.

‘We have not ruled out returning to 50 basis point increases if that is necessary.’

Borrowers since May have been dealt with seven consecutive monthly interest rate rises, but the most recent increases in October and November were in smaller, 0.25 percentage point increments.

The Reserve Bank has warned it could return to super-sized interest rate hikes to tackle the highest inflation in 32 years. Governor Philip Lowe (pictured) hinted borrowers could cop 0.5 percentage point rate increases again, like they did in June, July, August and September this year

The Reserve Bank has warned it could return to super-sized interest rate hikes to tackle the highest inflation in 32 years. Governor Philip Lowe (pictured) hinted borrowers could cop 0.5 percentage point rate increases again, like they did in June, July, August and September this year

This has taken the RBA cash rate to a nine-year high of 2.85 per cent, with economists and financial markets expecting more pain to come.

Despite the rate increases, inflation has worsened, hitting a 32-year high of 7.3 per cent in the year to September, with the Reserve Bank forecasting the consumer price index reaching 8 per cent by the end of 2022.

‘An inflation rate of 7 or 8 per cent was something that was widely thought to be consigned to the history books,’ Dr Lowe said.

‘So the current bout of high inflation has come as quite a shock.’

Dr Lowe warned higher wages could make inflation worse, as Prime Minister Anthony Albanese’s Labor government pushes for multi-employer bargaining in a bid to boost pay levels.

‘Domestically, we need to avoid a price-wage spiral,’ he told the Committee for Economic Development of Australia think tank. 

‘A number of other advanced economies are experiencing much faster rates of wages growth. 

‘So this is an area we are watching carefully.’

Dr Lowe warned higher wages could make inflation worse, as Prime Minister Anthony Albanese's Labor government pushes for multi-employer bargaining in a bid to boost pay levels (pictured are Sydney construction industry workers)

Dr Lowe warned higher wages could make inflation worse, as Prime Minister Anthony Albanese’s Labor government pushes for multi-employer bargaining in a bid to boost pay levels (pictured are Sydney construction industry workers)

Dr Lowe’s warning about a wage-price spiral contradicts Treasurer Jim Chalmers who, as recently as July, told Parliament wages weren’t to blame for inflation.

What the major banks now expect

WESTPAC: 3.85 per cent cash rate by May 2023

ANZ: 3.85 per cent cash rate by May 2023

NAB: 3.6 per cent by March 2023

COMMONWEALTH: 3.1 per cent by December 2022

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‘We don’t have an inflation problem because workers are earning too much or because we are in some kind of a wage‑price spiral,’ he said.

‘The wages of Australian workers are not causing this inflation.’

The wage price index in the year to September grew by 3.1 per cent – the fastest increase since 2013.

But this was still less than half the headline inflation rate, which meant workers are suffering a cut to real wages. 

Dr Lowe warned that double-digit inflation during the 1970s and 1980s was particularly bad for workers.

‘This experience also put paid to the idea that by allowing more inflation, we could have more growth and jobs,’ he said.

‘Rather, the reverse was true.

‘High inflation meant lower growth, fewer jobs and lower real wages.’

Unionised workers more than four decades ago benefited from industry-wide bargaining, where wage increases were replicated across entire sectors.

But this only fed inflation. 

In May 1981, average weekly earnings surged by 14 per cent and inflation that year reached 11 per cent, Australian Bureau of Statistics data showed.

Source

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