Assistant governor Christopher Kent,in a speech in Sydney on Wednesday,said there was evidence that retailers were starting to discount their prices to woo consumers who had been stung by the Reserve Bank’s string of rate rises.
Christopher Kent,assistant governor at the Reserve Bank,says high interest rates are working and will continue to curb inflation.Bloomberg
The bank has lifted the official cash rate from a record low of 0.1 per cent in May last year to 4.1 per cent. Inflation,which peaked at 7.8 per cent in December,has now fallen to 6 per cent,with expectations it will drop further over the coming months.
Kent,in a speech outlining the various ways higher interest rates work through the economy,said that in Australia one of the most significant impacts was through variable interest rates on home mortgages.
He said it was clear that the previous rate increases were working,noting that the full impact was still to be felt.
“These and the other channels of monetary policy are slowing the growth of demand and contributing to a decline in inflation,” he said.
“The lags of transmission mean that some further effects of rate increases to date are still to be felt through the economy,which will provide further impetus to lower inflation in the period ahead.”
Kent said compared with previous periods when the Reserve Bank lifted interest rates,the impact on the economy of the current episode had been slightly delayed due to the large number of Australians who took out fixed-rate mortgages from 2020 to 2022.
This large proportion of fixed-rate loans was now ending,which meant the proportion of household take-home pay required to cover mortgage repayments was climbing.
“Around half of all loans that were fixed at a low rate have now rolled off,and most of the rest will do so over the next 12 months,” he said.
The Reserve Bank has kept interest rates at 4.1 per cent for the fourth consecutive month in Michele Bullock's first meeting as governor.
“Required mortgage payments are at a record share of household disposable income and will rise further as more fixed-rate loans expire.”
This week, found Australians’ mortgage repayments by the end of last year consumed the largest share of household income of any country in the developed world. Interest rates have since been pushed higher.
Retailers are preparing for a tough Christmas,with the volume of goods and services sold over recent months falling as consumers reduce their overall expenditure.
Kent said the bank estimated that the 4 percentage point increase in the cash rate would reduce overall household spending by between 0.4 per cent and 0.8 per cent a year.
There were signs this drop in spending was forcing retailers to cut their prices.
“The effect of slower demand growth on inflation is now building. For example,we are hearing in liaison that a range of retailers are discounting prices in the face of weak consumer spending,” he said.
The RBA board,which held the cash rate steady at its meeting earlier this month,will next meet on Melbourne Cup Day. Financial markets believe there is a small chance the bank will lift rates before holding steady through most of next year.
Kent repeated the bank’s argument that interest rates may have to increase.
“The board is paying close attention to economic developments here and overseas,and some further tightening of monetary policy may be required to ensure that inflation,which is still too high,returns to target in a reasonable timeframe,” he said.
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