Reserve Bank governor Philip Lowe has acknowledged that rising interest rates are making it tough for many Australians right now, but he says the alternative is a weak banking system that is not in the national interest.
Appearing before Senate estimates on Wednesday (15 February), Dr Lowe said having strong banks making healthy profits was necessary for the economy.
“People are really hurting, I understand that, but I also understand that if we don’t get on top of inflation, it means even higher interest rates and more unemployment,” he told the hearing.
“The banks are profitable, it’s true. We want resilient banks. I know it’s hard for people to accept when they’re suffering. But the country is better off having strong, resilient banks that can provide the financial services that we need.”
Dr Lowe agreed that banks are slow to pass on rate rises to savings and deposit accounts, yet very quick to pass the increases on to mortgage customers.
“When we put up interest rates, the immediate effect, I think, is a boost to bank profits,” he said.
“Particularly if they’re slow in raising deposit rates, which they have been.”
Treasurer Jim Chalmers has tasked the Australian Competition and Consumer Commission with examining why banks do not pass on interest rates to savings customers quickly – an inquiry the RBA boss supports.
The ACCC will report its findings to the government in December this year.
Asked why the RBA continues to lift the official interest rate even while the cash rate target is at its highest rate since September last year, the governor flagged more rises to come.
“I don’t think we’re at the peak yet, but how far we have to go up, I don’t know,” he said.
“I understand why some people focus on the risks on the one side, but we’ve got to be attentive to the risk from higher inflation,” Dr Lowe said.
“It’s corrosive for the economy and all the evidence is if inflation stays high for too long, expectations adjust and that leads to higher interest rates and more unemployment.
“The risks are two-sided and we’re trying to navigate our way through a narrow path.”
Inflation is currently at 7.8 per cent, well above the RBA’s target of 2 to 3 per cent.
Unemployment must rise before inflation falls, he said.
Dr Lowe was criticised by the estimates committee for not delivering a public address following last week’s interest rates increase. He did, however, give a private briefing to major bank traders.
In 2021, the RBA governor said rates were not likely to increase before 2024, yet the official cash rate has jumped 3.25 per cent since May last year.
Committee members of all political persuasions took the governor to task over the RBA’s aggressive rising of interest rates, suggesting the bank could send the economy into recession.
Dr Lowe pointed out that there were nine members of the RBA board making “unpopular” interest rate decisions.
While insisting he wasn’t not complaining, he said he found it “a bit unfair” that all of the criticism was directed at him.