Reserve Bank of Australia governor Philip Lowe says interest rates still have further to rise to bring down inflation but can't say how many more hikes are needed.

In his first public appearance for 2023, Lowe says the cash rate has not yet peaked after the RBA board's record nine consecutive rate hikes.

"I don't think we're at the peak yet, but how far they need to go, we're still unsure," he told a Senate Estimates hearing on Wednesday.

Philip Lowe

RBA governor Philip Lowe has been under intense scrutiny over his communication on interest rates. Picture: AP

His comments come as retailers and Australia's largest home lender point to signs that consumer spending is starting to slow after the central bank's rapid rate rises.

It comes as the nation's competition watchdog launches an enquiry into bank savings rates, amid concerns lenders are passing on higher interest rates to home borrowers, and not savers.

Further interest rate hikes on the way


Lowe says the RBA board has an open mind about future rate moves.

"How far we have to go up, I don't know. It's going to depend upon inflation data, the resilience of spending, the strength of the global economy and what's happening with prices and wages."

Lowe says Australia's annual inflation rate of 7.8%, the highest since 1990, is "way too high and it needs to come down."

The RBA has already lifted the cash rate by 325 basis points since May, taking it from a record low 0.1% to 3.35%.

Lowe has been under pressure over the "unpopular" rate hikes but insists he will serve out his seven-year term which ends in September, pointing out the nine RBA board members make the decisions.

Financial markets are pricing in another three rate hikes, a view now shared by National Australia Bank economists who expect the cash rate to peak at 4.1% in May.

ANZ, Westpac and Commonwealth Bank of Australia forecast a peak of 3.85%.

All four majors expect rate cuts in 2024, with CBA tipping the declines will start in the December quarter this year to help avoid the prospect of a recession.

Morningstar investment management's chief investment officer Matt Wacher says the RBA may be forced to cut later this year. 

Announcing a record $5.2 billion half-year profit on Wednesday, CBA (CBA) chief executive officer Matt Comyn says the bank remains optimistic the Australian economy can achieve a soft landing.

"We are conscious that many Australian households are feeling significant strain from rising interest rates, alongside the rising costs of electricity, groceries and other household items," Comyn says.

"Despite this, consumer spend remains resilient with signs of spend slowing in pockets."

Rate hikes start to impact consumers and retailers


Some of Australia's largest retailers are reporting the start of a pullback in consumer spending, as shoppers focus on value.

Wesfarmers (WES) managing director Rob Scott says its value-oriented retailers like Bunnings, Kmart and Target are well positioned to meet changing demand as customers adjust to cost-of-living pressures.

"Elevated inflation and higher interest rates are expected to impact demand in parts of the Australian economy and result in households continuing to become more value conscious," Scott says.

Wesfarmers on Wednesday announced a 14.1% increase in first-half net profit to $1.38 billion, with revenue up 27% to $22.6 billion.

The group says its retail trading results for the first five weeks of the second half have been broadly in line with growth in the first half.

Morningstar director of equity research Johannes Faul says Wesfarmers shares are currently overvalued. 

"We anticipate the rising cost of living due to higher mortgage rates and consumer price inflation to force households to lower their spending on non-essential items," Faul says.

"Within Wesfarmers’ suite of businesses, we expect its department stores to be hit most."

JB Hi-Fi (JBH), Australia's largest consumer electronics and home appliance retailer, says sales have slowed since the start of 2023 with customers becoming more cautious as the economy enters an uncertain period.

JB Hi-Fi reported record sales - up 8.6% to $5.3 billion - and earnings for the first half of 2022/23 on the back of elevated customer demand and strong Black Friday and Boxing Day promotions.

But sales grew by just 2.5% at its 199 JB Hi-Fi Australian stores in January and were flat at its 106 The Good Guys stores.

"While we are pleased with the January trading result, with sales continuing to be well above the pre-Covid January 2020, we have seen sales growth start to moderate from the elevated levels seen in the first half of FY23," group CEO Terry Smart says.

Online furniture and homewares retailer Temple & Webster is also seeing a pullback by consumers, with its sales down 7% in the first five weeks of 2023.

Temple & Webster Group CEO Mark Coulter says there's been a flight to value by consumers, and the company is importing entry-level ranges as it repositions as a more value-based retailer.

"People are definitely looking for more value. As interest rates go up and as the housing market falls people are definitely feeling a bit poorer."

Investigation launched over savings rates


After a long period of low interest rates, savers are finally enjoying higher yields on their cash - although there's a catch.

In most cases banks are passing on the RBA hikes in full to mortgage rates but the Australian Competition and Consumer Commission says the increases on deposit products have typically been smaller and less consistent.

In many cases banks have only applied increases in the cash rate to some of their deposit products, often with conditions attached, the ACCC says in Wednesday's statement announcing an inquiry into deposit interest rates.

"We are aware that deposit and savings accounts are an important source of income for many Australians, typically supplementing their income from employment, superannuation and the pension," ACCC chair Gina Cass-Gottlieb says.

Australian households hold more than $1.3 trillion in savings and deposit accounts.

While 80% of banks' deposits are parked in at-call deposits including loan offset balances, the RBA's latest Statement on Monetary Policy says banks are paying no interest on around 15% of those balances.

The RBA says there has been limited pass-through of the cash rate to some interest-bearing at-call deposit accounts.

But savers have shifted into term deposits, where the average rates on new term deposits increased by more than the cash rate reflecting larger movements in the bank bill swap rate and longer-term swap rates.

According to comparison site RateCity, ING has the highest ongoing savings rate in the market at 4.8% for its savings maximiser account.

The highest term deposit rate on its database is also 4.8%, for Rabobank's 60-month product.

The big four banks now offer a 4% rate on some of their savings products, mainly bonus saver accounts that require customers to grow their balance each month.

Looking for long-term opportunities during reporting season


Interest rates, inflation and the economy are all-important this reporting season.

"Despite an overall gloomy outlook, the old adage 'horses for courses' still holds," Morningstar director Johannes Faul says.

"Each sector and every individual stock are likely to be impacted differently. For example, we expect some companies, including banks, to perform relatively well in a high interest rate environment."

With Morningstar emphasising the importance of taking a long-term approach to investing, director of individual research Mark LaMonica points out that earnings releases that are perceived as bad news can create buying opportunities.

"As long-term investors this can be an entry point into a great company even if the short term looks rocky and patience is required for the pessimistic narrative to pass,” LaMonica says.

"As long-term investors we should care little about short-term volatility except when it is an opportunity to find a great company that is temporarily beaten down."