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  • Aniket Pathak

Philip Lowe's view on current Economy and uncertain future.

Aniket Pathak : 17 Apr 2023

This is a review of a recent speech given by Philip Lowe: RBA governor in Press Club on 5th April 2023.

This amateur analysis intends to understand where we are and where we are heading.


As you may aware current RBA cash rate is at 3.6, which jumped from 0.1 in Nov 2020. In just 10 reviews, the rate has risen significantly, impacting all aspects of everyday life in Australia. While those having little bit of finance knowledge or know how the RBA cash rate works, had been predicting this for a long time. What was difficult to anticipate was just how high and how fast it will rise. I guess now we have seen where it is heading, but from here onwards Australia may differ from what other central banks are doing. Although we have not yet reached the peak, we now have a good idea of how far it will go.

In short, be prepared to bear this high cost for a while, this time inflation is a bit more complicated than usual as we will see below what Governor mentioned as external factors contributing more towards the economy than what we can control internally. Meanwhile things are improving and there is even a slight chance of early recovery as well.

While there is still uncertainty this speech from Philip Lowe helped to clarify some of the points that RBA might take in the coming months.

Below is snapshot of cash rate and inflation

So What is going on

Let's start with the statement Philip Lowe shared from APRA Chair John Lonsdale: "Australians can be confident that their banking system is among the strongest and most resilient in the world, with prudential safeguards above and beyond minimum international requirements."

This is significant considering the recent collapse of banks in the U.S. and Switzerland.

While the financial system is strong, everyone is feeling the heat of the high cost of living and the significant impact on household mortgages with added impact of high energy prices. Governor also emphasizes a lot on supply chain and supply-demand trends, which is causing a higher impact on inflation.

There were several questions from the press on why the rate hike was paused and what is expected next and I think the governor consciously provided very generic guidelines emphasizing the current uncertainty. What has come up many a times in his answers is inflation is expected to come down to the expected number of 3.0 by Mid-2025. This is a significant milestone that will define when the rates will start to come down. As per Governor "It’s too early, way too early, to be talking about interest rate cuts, and the balance of risk before the next rate hike, but it will depend upon the data."

Given the current numbers and looking at previous trends this Mid-2025 estimate is bound to change and hopefully towards the positive side as there is a thin but probable chance that we may achieve the inflation target of 3-4 in Q4 next year if not Q3 next year. This looks ambitious and CPI data in the coming months will dictate that significantly.

Why the rate pause

On the question of why Australia put a hold on the rates where other banks continue to raise the rate :

  1. Wages growth here hasn’t picked up at the same rate as it has in some other countries, particularly in North America. Wages growth in aggregate at the moment maybe is 3½ percent; in Canada and the US, it’s maybe 4½, 5 percent; and, in some European countries, it’s picked up as well.

  2. The other factor is that we have all this variable-rate debt. The average mortgage rate that Australians pay has been faster and larger than elsewhere around the world. One would expect that that would have a more subduing effect on household consumption.

  3. The Reserve Bank Board is prepared to have a slightly slower return of inflation to target than some other central banks. Our last set of forecasts have inflation returning to target by mid-25; that’s partly because of the supply side of things.

What are other central banks are doing

As a trend we have seen some of the central banks including U.S. are more aggressive in getting the inflation down to expected levels. But Australia seems to differ in this view. As per governor "whether it would be beneficial to get inflation back down to 3.0 percent a year earlier than mid-2025. There’s an argument for that, but it would mean job losses – more job losses – and our judgment at the moment is that, if we can get inflation back to 3.0 percent by mid-2025 and preserve many of those job gains that have been delivered in the last few years, that’s a better outcome than getting inflation back to 3.0 percent one year earlier and having more job losses.",

This dictates that RBA will be very conservative in rate high which means it will be a slow process to reach the peak, if we are not already there. So be prepared for a longer but a stable high-rate period.

Throughout his speech, it is very prominent that Australia is going to take a very conservative approach in leading the cash rate, which may not be the case, especially for the U.S. Governor has denied been under pressure from government for the conservative approach but all factors are pointing otherwise. Cost-of-living crisis is a worrying factor in current political environment, so there will some pressure to go slow on rates. This conservative approach might just save Australia from a possible recession which some economists are fearing about.

Mortgage "ramp-up"

On some of the questions on high mortgage rates, his response was "They’ve known for some time they have to pay higher rates. Most people are sensible and I think have been planning for it. It doesn’t make it easier, but they’ve been planning for it. And the banks tell us that they’re working very carefully with those customers as they make the transition and there’s been no deterioration in the credit quality of those borrowers. So this hasn’t come as kind of surprise on day 1; this increase in interest rates has been coming for some time, so people have had time to plan." Which is kind of true, but not completely. No banks and agents will warn clients of future concerns, especially during the pandemic when the rate where record low and everyone wants to lend as much as they can. so there are surely many people who would have bought properties without a certain idea when this mortgage cliff or in the governor's words "ramp-up" going to hit them. The threefold impact many owners are facing by moving from fix-rate to a variable rate might lead to devastating outcomes. On this specific topic, he did mention that as per the data received from banks, apparently the property owners are managing this well, but I think only time will tell in the coming few months.

Just to digress, the governor shared some interesting views on Australia's focus on housing - "Australians have chosen to live, by and large, in large capital cities on the coast, with fairly large blocks of land, and historically have underinvested in transport. They’re the reasons we have high housing prices. We have high housing prices because the price of land is high that’s embedded in each house. And it’s high because of the choices we’ve made as a society: where to live, how to tax housing, and how to invest in transport. So that’s the issue. We’ve made choices collectively as a society that give us high housing prices, and I wouldn’t say that it’s a distortion, but it’s just the consequence of the choices that the people who live in Australia have made, and we have to live with that."

There has to be some positives

Governor shed some light on good unemployment numbers and high saving of household as per the data shared by banks. The unemployment rate is around the lowest that it has been since 1974 – that is nearly 50 years ago – and underemployment is at a multi-decade low

So RBA needs to keep this in mind as high rate may lead to higher unemployment which is the last thing needed at current stage.

Apart from the impact on cost-of-living and the housing market, there is a lot to unpack from his speech especially the emphasis on the Supply chain side. half of his speech is to educate the audience on the supply-demand factors and its impact on inflation which suggest that we are living in a very uncertain time where the global factor started to impact more than locally govern inflation. Please read the entire speech on linked shared below.


  • Expect a high cash rate for a longer period compared to other countries

  • The cash rate most likely will reach 4-4.2 by end of the year unless inflation comes down drastically in a short time for RBA to hold the rates for a few more cycles.

  • RBA estimate inflation to come down to 3.0 by mid-2025, but there are few indicators of a much faster recovery.

  • The worst-case impact of inflation staying where it is will be on the proposed tax cut next year.

  • Although we currently do not see any correlation as it has yet to penetrate the market, launch of CBDC will help to get inflation down much faster as it will give government a different way of control.


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