Australia’s central bank raises key rate to 7-year high, signals more to come
AUSTRALIA’S central bank delivered its fourth consecutive half-percentage point interest rate increase and reinforced that it’s not on a predetermined route in its drive to rein in inflation.
The Reserve Bank raised the cash rate to 2.35 per cent, the highest level since 2015, from 1.85 per cent at Tuesday’s (Sep 6) meeting. The decision was predicted by 27 of 30 economists and means the Reserve Bank of Australia (RBA) is tightening at the fastest pace in a generation in a cycle that began in May when the rate stood at a record-low 0.1 per cent.
“The board expects to increase interest rates further over the months ahead, but it is not on a pre-set path,” RBA governor Philip Lowe said in a post-meeting statement. It’s “committed to doing what is necessary to ensure that inflation in Australia returns to target over time”.
The RBA is relying on very low unemployment and strong consumption to keep the economy ticking over during its tightening cycle. Australia’s latest hike reflects a resolve among global central bankers, reaffirmed at their Jackson Hole meeting, to keep raising rates until inflation eases meaningfully.
So far, the nation’s heavily indebted households have shown resilience to rising rates, which come on top of surging living costs. The labour market remains strong, with job advertisements still rising, indicating further falls ahead for unemployment that’s already at a 48-year low of 3.4 per cent.
Elevated inflation and rising borrowing costs “are putting pressure on household budgets, with the full effects of higher interest rates yet to be felt in mortgage payments”, Lowe said in his statement.
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“The board will be paying close attention to how these various factors balance out as it assesses the appropriate setting of monetary policy.”
Australia reports gross domestic product for the 3 months through June on Wednesday and economists predict a 0.9 per cent gain from the prior quarter and 3.4 per cent from the year earlier period.
On Thursday, Lowe will deliver his annual address to the Anika Foundation in a speech titled “Inflation and the Monetary Policy Framework.”
There are signs that a long-awaited acceleration in wage growth is taking hold, a relief for households whose income has been eroded by inflation that shows few signs of abating. But it’s another worry for policymakers who need to guard against a new round of wage-push inflation.
“Given the tight labour market and the upstream price pressures, the board will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms in the period ahead,” Lowe said today.
Yet many economists are predicting a return to quarter-point moves in October. Markets are less certain, signalling a 50-50 chance that the RBA slows down after today.
Adding to the uncertainty, swaps are pricing in a further 1 percentage point of hikes by year’s end. At present, the median estimate of economists is for the cash rate to peak at 3 per cent in this cycle, versus markets’ 3.8 per cent by mid-2023.
“Being too aggressive on interest rates could tip the economy into recession,” said Jo Masters, chief economist at Barrenjoey Markets Pty. “But equally there is a risk if too little is done and a wage-price-spiral emerges.”
Economists also warn the outlook is darkening, highlighting that RBA tightening tends to take about 2 to 3 months to flow through to households. That suggests consumption will start to weaken markedly by the end of the year.
The international backdrop is also worsening amid global tightening and geopolitical flashpoints.
Lowe has acknowledged that policymakers are walking a narrow path as they try to slow demand and inflation without sending the economy into reverse.
A key risk is the deteriorating property market. Data last week showed housing credit growth eased in July and house prices fell at the fastest pace since 1983 in August.
“Geopolitical risk is also elevated and as we have seen this year, can flow to the real economy,” Barrenjoey’s Masters said. “The outlook for China is always a risk for Australia, and there we are seeing pressures in the housing market that bear close attention.” BLOOMBERG
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