Australia takes up outlier rate stance, signalling smaller hikes
AUSTRALIA’S central bank chief staked out an outlier position among G10 currency nations, signalling a potential end to outsized interest-rate increases.
The currency sank and bonds rallied as Reserve Bank of Australia (RBA) governor Philip Lowe highlighted that rates have risen very quickly and pointed to “lags” in their flow-through to the economy. The RBA delivered a fourth straight half-point hike this week to take the cash rate to 2.35 per cent from a record-low 0.1 per cent in May.
“All else equal, the case for a slower pace of increase in interest rates becomes stronger as the level of the cash rate rises,” Lowe said in Sydney. In response, traders pared bets for rate hikes to quarter-point moves for the rest of 2022, from earlier pricing in at least one more half-point hike this year.
The governor added in response to a question after the speech that the RBA is “closer now to our estimates of neutral”, referring to a rate that is neither contractionary nor expansionary. “It’s at least 2.5 per cent, but I have a lot of uncertainty around what the actual number is.”
His comments contrast with global counterparts, including Federal Reserve chair Jerome Powell, who warned last month at Jackson Hole that borrowing costs are headed even higher and will remain elevated for some time.
Lowe’s more cautious approach reverberated through markets. Australian 3-year yields plunged as much as 23 basis points to 3.03 per cent. The Australian dollar slid 0.6 per cent to 67.29 US cents and touched a 2-month low of 67.13 US cents.
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“At the end of the day, our monetary policy is going to be determined by Australian-specific conditions,” the RBA chief told a gathering of economists. “Labour market dynamics in Australia are very different to what they are in the US and the UK.”
Lowe, in his speech, didn’t specify how high rates will need to go, saying only that the level and pace of tightening would be “guided by the incoming data and the evolving outlook for inflation and the labour market”.
Economists, like markets, expect the RBA will shortly slow the pace of increases to quarter-point moves. Money markets are pricing in a cash rate of 3.1 per cent by year’s end and a peak of 3.6 per cent around mid-2023.
The central bank is relying on the tightest labour market in half a century and still-strong household spending to keep the economy ticking over during the rapid tightening.
Lowe warned that a sharp slowing in global growth would make the job of delivering a soft landing in Australia “much harder”.
He highlighted 3 uncertainties for policymakers:
- A global environment where the Fed has indicated a period of tight policy and below-trend growth will be required to get inflation under control and a slowdown in China
- How inflation expectations in Australia adjust to a period of surging prices
- How households respond to rising borrowing costs
Lowe also spoke about an ongoing independent review of the RBA, which came after criticism of its performance before and during the pandemic.
Asked today whether he would resign his post, as some lawmakers have urged, the governor rejected the proposition and pointed out that Australia’s “economy is so much better” than it had been. BLOOMBERG
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