Lowe believes he can land the economy in one piece
Hopes for a "soft landing" live on at the Reserve Bank even as optimism fades overseas.
Record inflation can be tamed with little collateral damage to the economy or a red-hot labour market, according to Reserve Bank Governor Philip Lowe in an upbeat economic assessment out of step with markets weighing recession risk.
Inflation should start declining from “early next year” as global supply chains reknit, energy prices stabilise, and a higher cash rate slows spending, said Lowe in a speech to the American Chamber of Commerce on Tuesday. Fortress-like household balance sheets and booming commodity exports should help buttress the economy and leave record low unemployment undisturbed as inflation is reigned in.
“That’s a fairly narrow path we’re on,” said Lowe. “We’re trying to get demand and supply to increase at the same rate. Achieving that is difficult, so it is quite possible that at some point in time the unemployment rate will rise but I don’t think it needs to rise.
“I’m hoping we can get back to 2% and 3% [inflation] and keep the unemployment rate roughly where it is.”
Equity markets around the world are reeling from the most savage selloffs since the pandemic amid growing fears of a global recession. The S&P 500 and S&P/ASX 200 fell 5.8% and 6.6%, respectively last week as the US Federal Reserve hiked rates and downgraded growth and employment forecasts in a tacit admission its campaign against the highest inflation in four decades will throw people out of work and slow the economy.
Earlier in June, the World Bank slashed global growth forecasts and warned about the risk of a “protracted period of feeble growth and elevated inflation”.
Lowe struck an optimistic note when asked about the likelihood of an Australian recession, citing record numbers of people joining the workforce, the strongest terms of trade in history and a cash rate that remains relatively low.
“Our fundamentals are strong,” he said. “The position of the household sector is strong and firms are wanting to hire people at record rates. It doesn’t feel like a precursor to a recession.”
The rosy forecast would relieve equity markets increasingly weighed by recession risk and the rapid acceleration of rate hikes, says Shane Oliver, chief economist at AMP.
“Equity market would be overjoyed if that happened, it would be a goldilocks type scenario,” he says. “If the market started to believe that you would see a big rally in equities.”
Market pricing suggests investors remain sceptical central banks can bring down inflation with limited collateral damage, an outcome sometimes labelled “immaculate disinflation”.
A mild US recession is likely this year, according to a note from Nomura economists published on Monday. Local futures markets are pricing lots of rate pain, with the cash rate tipped for 3.5% by December and a peak of 4.1% by July next year.
Queried about market forecasts, Lowe said hiking the cash rate at the pace implied by markets would represent the sharpest rise on record under Australia’s inflation-targeting regime.
“I don’t think it’s particularly likely, but the market has been a better judge of where interest rates are going than we have over the past few years,” he said.
How far and fast the cash rate will rise is uncertain and Lowe said the bank would remain “data dependent”, with a particular focus on household spending.
Governor Lowe fronted cameras for the second time in a week to warn Australians to prepare for more rate hikes as the bank grapples with inflation that has repeatedly outpaced its forecasts. Lowe reiterated the bank’s forecast that inflation will top out around the 7% mark this year, first unveiled on the ABC’s 7.30 Report last Tuesday.
Returning inflation to the bank’s 2% to 3% band will take several years, and “we do not need to nor can we, get there immediately”, he added.