Reserve Bank of Australia Governor Philip Lowe admits he made mistake


Reserve Bank Governor Philip Lowe has admitted he made a mistake suggesting interest rates would not rise until 2024 and is now hinting at a 10 per cent fall in house prices.

The economist in charge of setting monetary policy repeatedly vowed in 2021 the cash rate would stay on hold at a record low of 0.1 per cent for another three years.

But Dr Lowe told the House of Representatives Economics Committee in Canberra it was a mistake to make ‘conditional’ forecasts about interest rates in 2020 and 2021, before Russia’s Ukraine invasion pushed up crude oil prices.

‘Some people think that was a mistake and it may well have been,’ he said on Friday morning.

‘Our forecasts have not been that good.’ 

Borrowers since May have copped five consecutive monthly interest rate increases, with the 2.25 percentage point rises equating to the most severe monetary policy tightening since 1994. 

The cash rate is now at a seven-year high of 2.35 per cent with Dr Lowe on Friday hinting at more interest rate rises with inflation forecast to hit a 32-year high in 2022.

Reserve Bank Governor Philip Lowe has admitted he made a mistake suggesting interest rates would not rise until 2024

As a result, house prices are in decline, with Dr Lowe suggesting that while he didn’t make real estate forecasts, a likely 10 per cent fall after a 25 per cent increase during the pandemic would still equate to a net gain of 15 per cent. 

‘It would not surprise me if prices came down 10 per cent,’ he said. 

Dr Lowe said the highest cost of land, especially near the coast, was responsible for expensive house prices after Sydney independent MP Allegra Spender asked him about housing affordability.

‘We have high land prices embedded which give us high house prices,’ he said. 

‘But the fact we have to pay higher prices isn’t anything to do with the Reserve Bank.’ 

Sydney’s median house price stands at $1.3million despite a 7.3 per cent fall since the start of January, CoreLogic data showed.

Melbourne’s mid-point house price is $948,879 with values falling by 5.1 per cent since the start of 2022.

As a result, house prices are in decline, with Dr Lowe suggesting that while he didn't make real estate forecasts, a likely 10 per cent decline after a 25 per cent increase during the pandemic would still equate to a net gain of 15 per cent (pictured is a Melbourne house)

As a result, house prices are in decline, with Dr Lowe suggesting that while he didn’t make real estate forecasts, a likely 10 per cent decline after a 25 per cent increase during the pandemic would still equate to a net gain of 15 per cent (pictured is a Melbourne house)

But since the start of 2022, Brisbane’s median house price has risen by 5.9 per cent to $864,149.

House prices fall in almost every capital city in August

SYDNEY: Down 2.6 per cent to $1,302,635

MELBOURNE: Down 1.5 per cent to $948,879

BRISBANE: Down 2.1 per cent to $864,149

ADELAIDE: Down 0.2 per cent to $707,364

PERTH: Down 0.2 per cent to $588,308

HOBART: Down 1.7 per cent to $772,443

DARWIN: Up 1.1 per cent to $592,183

CANBERRA: Down 2 per cent to $1,033,377

Source: CoreLogic data for August based on median house prices

In August, house prices fell in every capital city except Darwin, the downturn in Sydney and Melbourne starting before the RBA increased rates in May for the first time since November 2010.

The severe monetary policy tightening has already affected the property market with CoreLogic data showing a 1.6 per cent decline in national house and unit prices in August – the steepest monthly decline since January 1983.

National home prices last month dropped to a median level of $738,321.

But even with a 20 per cent deposit factored in, a $590,657 mortgage would be beyond the reach of a full-time worker earning an average $92,000 salary.

ANZ is now hinting interest rates could keep rising in 2023, after previously expecting the cash rate to peak at a 10-year high of 3.35 per cent in December. 

Dr Lowe said in future, he would refrain from being specific with a date when it came to interest rates, even if he was talking about existing economic circumstances. 

‘Our language will be vaguer,’ he said. 

He was adamant his remarks had been interpreted as promises when they were comments based on current economic circumstances.

‘I’m frequently reminded that many people interpreted our previous communications as a promise or as a commitment that interest rates would not increase until 2024,’ he said.

‘This was despite our statements on interest rates always being conditional on the state of the economy.

But Dr Lowe told the House of Representatives Economics Committee in Canberra it was a mistake to make 'conditional' remarks about interest rates last year, before Russia's Ukraine invasion pushed up crude oil prices

But Dr Lowe told the House of Representatives Economics Committee in Canberra it was a mistake to make ‘conditional’ remarks about interest rates last year, before Russia’s Ukraine invasion pushed up crude oil prices

‘This conditionality often got lost in the messaging so we’re currently working through the implications of this for our future approach to forward guidance and for communication more generally.’ 

Inflation, for most of last year, had stayed within the Reserve Bank’s two to three per cent target. 

Treasurer Jim Chalmers in July launched a review into the Reserve Bank’s monetary policy decisions with a focus on its communications strategy.

Inflation in the year to June climbed by 6.1 per cent but the RBA and Treasury are now both expecting it to hit a fresh 32-year high of 7.75 per cent in 2022. 

Dr Lowe told the hearing the RBA was weighing up whether to raise the cash rate by 25 or 50 basis points, equating to a 0.25 percentage point increase or a 0.5 percentage point rise. 

ANZ on Friday released a new economic note predicting a 50 basis point rate rise in October with more rate rises in 2023 – having previously forecast the cash rate peaking in 2022 during this monetary policy tightening cycle. 

‘Tightening may extend into 2023,’ the bank said.

‘We suspect that any extension into 2023 will come after a pause of some months as the RBA tries to gauge the extent to which inflation pressures are easing after 325 basis points of rate hikes.’

Philip Lowe’s interest rate promises

OCTOBER 2021: ‘It will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range

‘The central scenario for the economy is that this condition will not be met before 2024’

AUGUST 2021: ‘The board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range

‘The central scenario for the economy is that this condition will not be met before 2024’

JUNE 2021: ‘It will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range

‘For this to occur, the labour market will need to be tight enough to generate wages growth that is materially higher than it is currently

‘This is unlikely to be until 2024 at the earliest’

 

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