Phillip Lowe, the Reserve Bank Governor, made an upbeat assessment of the economy that is at odds with markets pricing recession risk, saying record inflation can be brought down with little collateral damage to the economy or a sizzling hot labour market.
Inflation would begin easing from “early next year” as global supply chains were repaired, energy prices stabilised and a higher cash rate suppressed spending, Lowe said in an address to the American Chamber of Commerce on Tuesday. Fortress-like household balance sheets and a boom in commodity exports should help buoy the economy and spare record low unemployment as inflation is brought to heel.
“That’s a pretty tight rope we’re walking,” Lowe said. “We’re trying to get demand and supply to grow at the same rate. That’s hard to achieve, and so it’s quite possible that at some point in time we do see the unemployment rate rise but I don’t think we need to see it rise.”
“I’m hoping that we can get back to 2-percent and 3-percent [inflation] and keep the unemployment rate roughly where it is.”
But equity markets around the world are reeling from savage selloffs not seen since the pandemic, as fears of a global recession multiply. US interest rate and economic outlook revisions by the Federal Reserve sent development stocks on which the world relies for job creation tumbling, the S&P 500 and S&P/ASX 200 down 5.8% and 6.6%, respectively, last week.
The World Bank in early June cut its global growth forecasts and cautioned that the world was at risk of a “protracted period of feeble growth and elevated inflation.”
When asked whether there was a chance of Australia entering some new economic recession, Lowe sounded an optimistic tone, saying we have record numbers of people coming into the workforce, the best terms of trade of all time and a cash rate which remains low.
Our fundamentals are solid, he said. “The household sector has a very strong position, and firms are trying to hire people at record pace. It doesn’t feel like a leading indicator of a recession.”
The optimistic outlook would take pressure off equity markets that have been increasingly burdened by recessionary threats and the sudden speed of rate hikes, according to Shane Oliver, chief economist at AMP.
“If that happened, the equity market would be overjoyed, it would be a goldilocks type scenario,” he says. “If the market began to think that, you’d get a big rally in equities.
Market prices imply that investors continue to doubt that central banks can tame inflation without excessive collateral damage, an alternative outcome sometimes called “immaculate disinflation.”
Nomura economists said they expect a mild US recession later this year, in a note published Monday. There are huge amounts of rate pain priced into local futures markets, with the cash rate pencilled in at 3.5 per cent by December and peaking at 4.1 percent in July next year.
Asked about market expectations, Lowe said lifting the cash rate at the pace suggested in markets would be the steepest increase on record since Australia adopted inflation targeting. “I don’t think that’s particularly likely, but the market has judged better where interest rates have been going than we have for the last few years,” he said.
How high and how quickly the cash rate would rise remained uncertain and Lowe said the bank would remain “data dependent”, notably on household spending.
Governor Lowe took to the cameras for a second time in one week to warn Australians that they should brace for further rate hikes as the bank wrestles with inflation that has repeatedly come in ahead of its forecasts. Lowe also reiterated the bank’s view that inflation will peak around 7% this year, which was first revealed on the ABC’s 7.30 Report on Tuesday last week.
It would take years to return inflation to the bank’s 2% to 3% band, and “we do not need to nor can we get there immediately,” he added.
