Speaking on inflation and monetary policy to the Anika Foundation on Thursday, RBA Governor Dr Philip Lowe pointed the finger at pundits criticising the RBA for its seemingly unrealistic inflationary expectations.

Citing the lift in inflation as a surprise outside of the 1.75% forecast for 2022, Dr Lowe noted the RBA has plenty of company in not predicting this lift in inflation.

“Some forecasters were certainly expecting higher inflation than we were, but the magnitude of the pick-up in inflation has taken everybody by surprise,” Governor Lowe said.

“Forecast misses of this scale should lead to soul-searching by forecasters and they certainly have at the RBA.

“It is important that we learn from this and improve our understanding of the inflation process.”

The RBA now anticipates inflation to hit 7.75% prior to year’s end – an increase of over 342% on its original 1.75% forecast.

Understanding the inflation process has prompted shift in language from Dr Lowe, with the dovish doctor who was previously vague on interest rate increases, appearing to turn into more of a hawk.

“The Board expects that further increases in interest rates will be required over the months ahead,” he said.

“We recognise that, all else equal, the case for a slower pace of increase in interest rates becomes stronger as the level of the cash rate rises.

“But how high interest rates need to go and how quickly we get there will be guided by the incoming data and the evolving outlook for inflation and the labour market.

“The Board is committed to the return of inflation to target. It is seeking to do this in a way that keeps the economy on an even keel. It is possible to achieve this, but the path here is a narrow one and it is clouded in uncertainty.”

Dr Lowe pins the evolving inflation outlook to three key sources of uncertainty – global economic environment, domestic uncertainty, and the response of Australian households to higher interest rates.

“Interest rates are increasing for the first time in 12 years, and they are rising quickly. The full effects of this are still to be felt,” Dr Lowe said.

“On the other hand, many households have built up large financial buffers, including through offset accounts, and the household saving rate remains higher than it was before the pandemic.”


ABS latest household savings data revealed a two-year low in the household savings ratio, reaching back to single figures for the first time in over two years.

As Aussies begin to empty their pockets to combat cost of living pressures, when questioned as to who exactly holds these buffers, Dr Lowe noted it is more those with white collar jobs.

“The reality is most of the savings buffers sit with upper and middle income households,” he said.

“Many people with white collar jobs were able to keep their jobs during the pandemic, they couldn’t spend and instead saved by placing that money into offset accounts."

Dr Lowe’s address comes fresh off the back of another cash rate increase in September, with mortgage interest rates now likely to rise another 50 basis points this month.

For homeowners with an average sized mortgage, a 30-year 3.00% p.a. interest rate increasing to 5.25% p.a. over the past five months means paying an extra $795 in monthly interest costs.

CommBank Head of Australian Economics Gareth Aird said the RBA is now “flying blind” in terms of the economic impact of the interest rate hikes. 

"Provided the RBA pauses for at least a few months, when the cash rate is 2.60% or 2.85%, the data will show there is no need to continue to take the policy rate higher," he said. 

"The Australian economy is largely in the RBA's hands."


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