Reserve Bank of Australia (RBA) governor Philip Lowe has urged borrowers to start preparing for higher interest rates.
Speaking at the Banking 2022 Conference, Dr Lowe said many borrowers have had no experience with an interest rate-rise cycle.
“The last time the RBA increased the cash rate was in November 2010, that’s more than 11 years ago.
“To many borrowers that is going to come as quite an unwelcome development,” Dr Lowe acknowledged.
Last week, the governor acknowledged the risk of waiting too long to lift rates, especially in a world with overlapping supply shocks and a high headline inflation rate.
It was also the first time the governor acknowledged a rate hike could be on the cards for this year.
“It’s not guaranteed, but it’s plausible,” Dr Lowe reiterated on Friday.
The governor, however, stressed that the preconditions for a rate hike have not yet been met.
“We still have modest inflation here,” Dr Lowe said.
He explained that the RBA is still waiting for the 2.6 per cent underlying inflation to sustainably rest within its 2 to 3 per cent target.
But recent developments “have moved us closer to that point,” Dr Lowe said.
“One issue we’re paying close attention to is the inflation psychology. For many years, firms were reluctant to put up their prices and because they didn’t want to put up their prices, they didn’t want to put up wages.
“It’s quite possible a period of protracted headline inflation will see this psychology shift and firms will decide they have to put up their prices and their prices are rising they can afford to pay higher wages,” Dr Lowe continued.
“We’re watching very carefully for any shift in inflation psychology, if that shift occurs, inflation would be higher and more persistent and we would need to respond.”