Reserve Bank of Australia governor Philip Lowe has defended raising interest rates to their highest point in more than decade despite the financial stress caused for millions, arguing the "serious damage" from high inflation would be even worse.
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In an assured performance in the face of intense questioning from senators from across the political spectrum, Dr Lowe accepted that the central bank - and himself personally - were unpopular at the moment but rejected suggestions he should resign and said the pain being felt now was necessary to avoid even worse outcomes were price pressures to persist.
"It's 30 years since we have had higher inflation and many people have really forgotten the really serious damage that does to people, to livelihoods, the functioning of the economy," he told the Senate Economics Legislation Committee. "If it persists and leads to higher interest rates and more unemployment and we really want to avoid that."
"When we're raising interest rates ... it's unpopular in large parts of the community. And it's job of the central bank to do sometimes what's unpopular in the national interest. And that's what we're doing."
During the hearing Dr Lowe revealed that he had been personally affected by accounts of hardship caused by the rate hikes.
"I get a lot of people writing to me at the moment telling me about their personal circumstances and it's really, really tough, I understand that," he said. "I read those letters and hear those stories with a very heavy heart. I find it disturbing."
But the governor offered little comfort for those struggling financially, warning that interest rates will probably have to go higher. Markets predict they will reach 4.1 per cent by mid-year.
While rejecting suggestions that he had inferred interest rates could reach 4.75 per cent, Dr Lowe repeated his warning that they were likely to increase.
"I don't think we are at the peak yet. How far do we have to go up? I don't know," the governor said, adding it would depend on how inflation, consumer spending, wages and global economic conditions evolved.
There have been calls for Dr Lowe to resign and Greens Senator Nick McKim asked the governor whether he deserved to hold on to his job.
The governor replied that he had been appointed to a seven-year term "and I intend to serve out that term. It's an important job, it comes with public accountability ... but I intend to serve out that term".
Dr Lowe admitted that much of the anger caused by high interest rates had been directed at him, but he was at pains to emphasise that setting monetary policy was a collective decision of the Reserve Bank board.
"The decisions that the Reserve Bank make are made by a board of nine people. Not just me. We make them collectively and collaboratively and the board has made these decisions and I think it would be a very bad outcome for the board [for me] to have to resign," he said.
Both Dr Lowe and Treasury secretary Steven Kennedy (who appeared before the senate committee before the RBA governor) indicated that much of the current inflation problem had its origins in offshore supply shocks caused by the effects of the pandemic and the war in Ukraine.
But Dr Lowe said that more recently prices were increasingly being pushed up by domestic demand, citing a 7 per cent leap in spending on travel and accommodation in the December quarter, as well as growth of more than 2 per cent in purchases of clothes, footwear and household goods.
"There is increasingly a demand element to the inflation [although] we're starting to see some evidence ...that demand is moderating and the rate of increases in these areas will come back," he said.
But Dr Kennedy indicated there was no immediate relief in sight for tenants, warning rents were set to continue increasing through the first half of year.
"We expect rental prices can pick up considerably as the stock of rental agreements turns over, peaking in June of this year," Dr Kennedy said.
According to the governor, the economy could nonetheless successfully navigate a "narrow path" to bring inflation down while limiting any increase in unemployment to 4.5 per cent.
And although last week Dr Lowe voiced concern about the possibility of a wage-price spiral, he told the Senate committee the risk of this was "relatively low".
"At the moment, we don't really see evidence of that occurring. We think that growth in the wage price index will get up to 4 per cent, maybe a bit higher, and probably not go much higher than that," he said.
But the governor warned that if one did develop it could be very damaging.
"[The risk] is low, but I don't want to give the impression that we're not worried about it, because we are. Not because the probability's high, but because the cost of that happening is very high," he said.
Earlier, Dr Kennedy said the fact that wage setting mechanisms like pattern bargaining "are not [present] ...significantly reduces the risk".
The Treasury secretary added that growth would "slow significantly" this year.
Opposition senators quizzed Dr Lowe and Dr Kennedy on whether the government's policies and spending priorities were adding to the nation's inflation challenge.
The Treasury secretary admitted that the government faced a significant budget challenge, telling senators that structural budget deficits of around 2 per cent of gross domestic product are projected over the medium term, "which makes the need for fiscal consolidation clear".
The Treasury head said "several payments are growing faster than this [including] government debt and growing expenditure on the NDIS [National Disability Insurance Scheme], health, aged care."
"Interest payments and the NDIS are projected to be to two fastest growing payments over the next decade, growing by around 14 per cent per year on average to 2032-33."
But Dr Lowe said fiscal policy was "broadly neutral".
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"The government is saving most of the terms of trade is a revenue boost, so that's positive. It would be problematic if that were not the case and that money was being recycled back into aggregate demand but it's not and I welcome that," he said.
In the wake of criticisms about his decision to provide a private briefing to bank traders following last week's rate announcement rather than address a public function, Dr Lowe said that, " if I'd had my time again, I'd do things differently".
There had been concerns that the bond market moved while he was at the briefing, but the RBA governor said there was "nothing untoward" about the meeting, saying he talked about what had been in the interest rate announcement and a subsequent analysis found that bond yields began before he started speaking .
He defended the need for such meetings: "I can't live in a bubble. I need to talk to people. I need to hear what financial markets say and I like asking people questions".
But the governor accepted people found its timing "difficult" and a decision had been taken to "no longer do those type of lunches before the release of the Statement on Monetary Policy."
Dr Lowe also shrugged off concerns raised by Coalition senators Andrew Bragg and Jane Hume that remarks by Assistant Treasurer Stephen Jones about interest rates impinged on the RBA's independence.
"I don't feel like...the independence of the institution is under attack. It's not affecting our decision-making, let me assure you that," he said. "Decisions are based on the data and the facts and not the noise around."
