No recession on my watch & no runaway cash rate: RBA chair Philip Lowe

Comments from the Reserve Bank chair Philip Lowe today have gone some way to responding to a barrage of criticism, especially over the timing around interest rate hikes.

One of the RBA governor's harshest critics, former treasurer Peter Costello, lambasted the central bank for “completely missing” the surge in inflation, heightening the risk of a recession with its worst monetary policy failure in three decades.

“The RBA completely missed the take-off point in the March quarter and now it’s behind the curve,” Costello recently told The Weekend Australian.

“It’s the worst failure in monetary policy since the 1990s, and the consequences are that the RBA now has to raise interest rates faster and further than would otherwise be the case.”

Definitely not 4%

Within an AMCHAM speech/Q&A this morning Lowe put paid to mounting financial market speculation around runaway cash rates.

While Lowe didn’t offer any new clues on how far borrowing costs would eventually need to rise, he poo poo’d suggestions the cash rate would end the year at nearly 4%, noting the outcome was not "particularly likely" or "reasonable".

"To get to 4 per cent we would need to raise rates by 50 basis points at the remaining six meetings and have a 75-basis point increase in there as well," Lowe noted.

After carefully tracking the impact of higher borrowing costs on household spending, Lowe said the board at the next meeting in July would again consider whether to hike by a quarter of a percentage point, or by a half.

Don’t fear the R word

In an attempt to silence some of his critics, Lowe also made light of suggestions that climbing interest rates here and abroad would send Australia into a recession.

He also pledged not to repeat the costly mistakes of the 1970s stagflationary period, vowing to “do what is necessary” to squash inflation before it becomes entrenched in the national psyche.

"I don’t see a recession on the horizon here… at the moment the unemployment rate is the lowest in 50 years. The participation rate is the highest ever. Our terms of trade are at the highest ever, which is really boosting our national income," he said.

"Our fundamentals are strong, and firms are trying to hire people at record rates. It doesn’t feel like a precursor to a recession."

No-risk wage growth

Lowe also reminded the market the ideal level of wages growth was around 3.5%, while wages above this risked embedding higher inflation longer term.

This is turn, added Lowe would necessitate a slower economy and possibly rising unemployment to bring it back under control.

"In the 1970s wages growth responded mechanically to the higher inflation rate. I’m hopeful we can avoid that, but it's an important issue. 3.5 per cent wage growth is better than 2%, and it's better than 5%."

1.35% on 5 July

After delivering back-to-back rate hikes in May and June, the RBA is expected to lift rates by a further half a percentage point to 1.35% when it next meets July 5.

“How fast we increase interest rates, and how far we need to go, will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labour market,” noted Lowe.

The RBA governor has previously flagged that 2.5 per cent could be considered a “neutral” rate.