Interest rates 'are not on a predetermined path', says Lowe

In his secondary appearance before a parliamentary committee this week, Dr Lowe said market expectations that rates peak mid-year and begin to retreat in 2024 "is a plausible scenario".

"That can happen if we get on top of inflation, if inflation expectations stay well anchored, the supply-side problems get fixed up [and] wage growth ... doesn't kind of move up too fast," the governor said.

"That is a plausible scenario, that rates rise and then start coming down next year. But a few things are going to have to go right for that to happen."

Dr Lowe appeared before the House of Representatives Standing Committee on Economics a day after the release of figures showing the unemployment rate increased by 0.2 of a percentage point to 3.7 per cent in January.

The RBA governor said the result had not changed the central bank's expectations that more rate hikes were needed given that inflation in the December quarter was "way too high".

But if the unemployment rose further in February, that "would be a big piece in the jigsaw puzzle," he said.

"If we saw employment growth was slowing a lot, and we saw retail trade and consumer spending data suggesting things are slowing down and we're hearing that from businesses as well, that would be pretty powerful information."

The governor emphasised that monetary policy was not "on a predetermined path".

He said that if inflation and growth came down more quickly than expected "then we don't have to do as much on interest rates".

The RBA head was grilled by MPs from both the major parties and independent MP Allegra Spender about the impact of higher interest rates on the economy and some groups in particular, including mortgage holders and renters.

Dr Lowe admitted that the impact of high interest rates was being felt "very unevenly" across the economy, but "it's the only tool we have, so we have to use it".

"There's a lot of unevenness, and people with mortgages, particularly low income people with mortgages, are bearing a disproportionate share of the burden here," he said.

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But the governor could provide few words of comfort in the short-term.

He warned that, as painful as interest rate increases were now, it would be far worse if high inflation and inflation expectations became entrenched.

The RBA governor defended the rapid succession of rate hikes, telling the committee that "if you have a chance to get inflation down reasonably painlessly, you take it".

The central banker warned that if inflation was allowed to remain high for a sustained period and became embedded in people's price and wage expectations the consequences would be very damaging.

"High inflation is damaging and corrosive. It hurts people, puts pressure on household budgets and erodes the value of people's savings. It increases inequality and hurts people on low incomes the most," Dr Lowe said.

Dr Lowe told the committee that the experience from the period of high inflation in the 1970s and 1980s was that sustained high inflation eventually caused the unemployment rate to increase by 5 per centage points.

"If inflation does become ingrained in people's expectations, bringing it back down again is very costly. History teaches us that once inflation becomes ingrained the end result is even higher interest rates and even greater unemployment to bring inflation back down. It would be dangerous, indeed, not to contain and reverse this period of high inflation."

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