A senior RBA official is worried about rate rises 'spooking' households

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  • Ian Harper, Reserve Bank of Australia (RBA) Board member, has warned a near-term increase in official interest rates could “spook” Australian households, increasing the risk of a pullback in spending at a time when home prices are falling and wage growth is weak.
  • Harper says the RBA’s latest economic forecasts suggest “a rise in interest rates down the pipe a bit”.
  • Like RBA Governor Philip Lowe, Harper says the next move in official interest rates is likely to be higher.

Ian Harper, Reserve Bank of Australia (RBA) Board member, has warned a near-term increase in official interest rates could “spook” Australian households, increasing the risk of a pullback in spending at a time when home prices are falling and wage growth is weak.

“The best contribution the bank can make at this juncture is to do what they are doing, which is just to sit and make it quite clear what the logic is, and give a sense of where the economy is headed,” he said in an interview with the Wall Street Journal.

He added that the RBA’s recent mantra on supporting confidence and stability in the economy “is the right story”, referring to the view offered by the bank that steady interest rates should be regarded as “source of stability and confidence”.

Harper said any near-term increase in the cash rate could spook consumers, especially given the pressure on household balance sheets from a downturn in the housing market, soft incomes growth and decline in the proportion of incomes being saved.

“People have been running their saving down to maintain their level of consumption, but there has been no growth in incomes,” he said, referring to the boom in household consumption in the June quarter that was fuelled in part by a reduction in the household savings ratio to the lowest level in over a decade.

“At some point you might expect people to say that they are not running down their savings any more because don’t see the increase in wages we’ve been expecting to come along.

“You don’t want to precipitate that by either encouraging savings to pick-up again or to spook people into a situation where they feel they need to pull their horns in.”

The RBA continues to describe the outlook for household spending, the largest part of the Australian economy as just over 55%, as “one continuing source of uncertainty [for the Australian economy]”.

In his opinion, Harper told the WSJ that the RBA’s latest economic forecasts offered in August “indicate that we are on track for the sort of growth and unemployment rates that would be associated with a rise in interest rates down the pipe a bit”.

Like RBA Governor Philip Lowe, he also suggested the next move in official interest rates was likely to be up, rather than down.

“There is no indication that that would change,” he said.

Currently, financial markets put the odds of a 25 basis point increase in the RBA cash rate at less than 50% by the end of next year.

ASX

An increasing number of economists are also adopting this mindset, including those at Westpac Bank who don’t see the RBA tightening policy until 2021 at the earliest.

You can read more at The Australian here.

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