Australia’s central bank is raising rates, it says policy and not on a set path

0
3

However, RBA Governor Philip Lowe made the policy outlook more conditional.

Markets interpreted this as a dovish move. Lowe had repeatedly stated that the RBA Board wanted rates to reach a neutral level of at least 2.5 percent, where they would neither stimulate nor retard economic growth. Investors reacted by driving the local currency down 0.9 percent to $0.6963, while three-year bond futures rose 11 ticks to 97.280 as the market trimmed bets on how far and fast interest rates would eventually rise.

“The statement was on the dovish side of expectations, suggesting that the discussion at the September meeting may well move back to the 25bp or 50bp debate,” said Adam Cole, a strategist at RBC Capital Markets.

Swap markets increased the odds of another half-point increase in September, implying a peak of around 3.31 percent, down from 3.41 percent before the RBA statement. Lowe also updated the RBA’s economic forecasts, predicting that consumer price inflation would peak at around 7.75 percent, up from 7 percent previously and 6.1 percent in the June quarter. Inflation was not expected to return to the RBA’s 2-3 percent target band until 2024.

Story Highlights

  • The Reserve Bank of Australia raised interest rates for the fourth month in a row on Tuesday, but provided tempered guidance on future hikes, predicting faster inflation but also a slowdown in the economy. The Reserve Bank of Australia (RBA) raised its cash rate by 50 basis points to 1.85 percent at the end of its August policy meeting, bringing the total to 175 basis points since May, the most drastic tightening since the early 1990s.

  • “The Board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a pre-set path,” said Lowe.

Economic growth projections have been reduced to 3.25 percent in 2022 and 1.75 percent in each of the following years. Previously, the bank predicted 4.2 percent growth in 2022 and 2.0 percent growth in 2023.

KEEPING AN EVEN KEEL

Lowe argued that the economy could withstand the pain because unemployment was at a 48-year low of 3.5 percent and job vacancies were at an all-time high. Household demand has fared relatively well, thanks in part to extra savings amassed during pandemic lockdowns totaling A$260 billion ($178.59 billion). Nonetheless, higher borrowing costs are a significant drag on spending power, given that households owe so much. After a bumper 2021, A$2 trillion in mortgage debt and home values are now in sharp decline. The increases announced thus far will add approximately A$560 per month to the average A$620,000 mortgage, on top of rising energy and food bills. Lowe has come under fire for the rapid succession of hikes, with one local tabloid calling for him to resign. Treasurer Jim Chalmers has defended the central bank’s independence, but he has recently launched a review of policymaking and the Board to determine whether it needs to be modernised. On Tuesday, Lowe admitted that the bank was treading a “narrow path” between taming inflation and keeping the economy on a “even keel.”