Issue Date: Wed 11-Apr-2018
Article Source: http://www.afr.com/news/economy/first-interest-rate-hike-will-come-as-a-shock-warns-r...
First interest rate hike will come as a shock, warns RBA governor Philip Lowe
Reserve Bank of Australia governor Philip Lowe says a likely official interest rate hike will come as a shock to many households given they haven't seen one in seven years, but insisted it will only happen once growth and incomes lift
Again warning the next shift in the official cash rate will be up rather than down, Dr Lowe hosed down expectations for a sudden pickup in growth and wages - improvements in both are likely to be "only gradual" and weaken the case for any near-term change in policy.
In a speech that focused heavily on how economic growth and employment is lifting across the nation - with unemployment in regions lower than in cities for the first time in decades - Dr Lowe noted that there are still risks darkening the outlook.
These include a trade war that would "put the health of the global economy at risk and damage the Australian economy", China's efforts to avoid a financial system crash, and high levels of Australian household debt, which "remains a source of vulnerability".
Dr Lowe urged borrowers to remember that as the economy improves, interest rates will be lifted.
"The last increase in the cash rate was more than seven years ago, so an increase will come as a shock to some people," Dr Lowe told an audience in Perth at the Australia Israel Chamber of Commerce.
"But it is worth remembering that the most likely scenario in which interest rates are increasing is one in which the economy is strengthening and income growth is also picking up."
The Reserve Bank has left the official cash rate at 1.5 per cent since August 2016, and financial markets don't anticipate more than a one third chance of a rate hike before 2019. Many economists expect the cash rate to be left untouched until 2020.
Reinforcing that view, Dr Lowe said progress in lowering unemployment - currently sitting at around 5.5 per cent - to a level at which a dearth of labour drives up wages and inflation will take time.
Rate hikes and tighter monetary policy abroad - led by the US Federal Reserve's expected hiking cycle - are unlikely to prompt the Reserve Bank into matching increases, he suggested.
"While some other central banks are raising their policy rates, we need to keep in mind that their economic circumstances are different and that they have had lower policy rates than us over the past decade," the governor said.
Titled "regional variation in a national economy", Dr Lowe's speech canvassed Reserve Bank research that shows the nation's regions are becoming more alike in terms of employment and economic growth.
"Over time, the industries we are working in, and our occupations, are becoming more alike across Australia, not more different," Dr Lowe said.
"One important reason for this is the increasing relative importance of service industries, and the decline in the relative importance of manufacturing."
Still, Dr Lowe contrasted the growing sameness of much of Australia's economy with significant differences, such as on wages income and houses.
He cited tax office data shows some regions have average wage income more than 50 per cent the national average, and incomes tend to be higher in the capital cities.
House prices are also more widely dispersed than at any time since the early 2000s.
Dr Lowe insisted rate hikes will only happen once growth and incomes lift. Gabriele Charotte
"This mostly reflects the big run-up in housing prices in Sydney and Melbourne at a time when price growth in the rest of the country has been subdued," Dr Lowe said.
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