Reserve Bank governor Philip Lowe has foreshadowed slower mortgage bill hikes later this year as the bank grapples with massive uncertainties about the outlook for soaring inflation and the economy.

Dr Lowe gave a wide-ranging speech on Thursday, addressing the outlook for interest rates, inflation, the prospect of an economic downturn in Australia, and even calls for his resignation.

Inflation ‘surprise’

Mortgage bills are the largest single monthly expense for millions, and despite already hiking typical bills by $652 since May the RBA is set to lift rates further in late 2022, albeit at a slower pace.

• Dr Lowe admitted Australia’s 30-year high inflation rate was a ‘‘very large surprise’’ to the RBA, calling rising prices a ‘‘scourge’’
• He said the RBA will keep using rate hikes to curb this inflation, but did flag slower rises now that rates are up from earlier record lows
• He said slowing inflation without triggering a downturn will be difficult and is mired in risks, namely changes in public “inflation psychology”.

‘‘All else equal, the case for a slower pace of increase in interest rates becomes stronger as the level of the cash rate rises,’’ Dr Lowe said.

‘‘But how high interest rates need to go and how quickly we get there will be guided by the incoming data and the evolving outlook for inflation.’’

The big picture

Global sources of inflation (high commodity prices and lengthy shipping delays) are now easing, supporting an RBA view that the pace of price rises in Australia will begin to moderate.

But higher wages growth may mean prices rise more than otherwise, Dr Lowe said.

Dr Lowe said there are big uncertainties hanging over the rate outlook that may require higher rates or cause a painful economic downturn:

• The global economic outlook is souring as the US central bank flags lower growth as rates rise, Europe suffers a cost-of-living crisis and China navigates COVID restrictions and a property downturn
• A shift in local inflation psychology may mean that inflation rises higher than otherwise in Australia as workers ask for higher wages and businesses adjust their prices to be even higher in response
• Household budgets are under pressure despite a strong jobs market and large pandemic savings. This could drive a faster-than-expected slowdown in spending that could curb economic growth.

‘The right choice’

Dr Lowe was asked about calls from Greens and Nationals politicians for his resignation amid soaring inflation and RBA rate hikes.

In response, he delivered a rebuke to his critics, admitting the RBA did contribute to inflation with record-low rates during the pandemic, but said this was the right decision to insure the nation against COVID-19.

‘‘During the pandemic we said: ‘What’s the bigger policy error to make?’’’ Dr Lowe said. ‘‘Do too much, or do too little?

‘‘If we do too little and the unemployment rate is 15 per cent and tens of thousands of people are dying every month, the economy, our society would have paid a very heavy cost.

‘‘If we did too much then we’d have to increase interest rates and I’d get all this criticism and calls for my resignation.

‘‘In the end, I think we made the right choice … people have jobs, kids have opportunity and household incomes are rising – that’s what I’d say to people who don’t like me in my job.’’