SYDNEY (BLOOMBERG) – Australia’s central bank gave itself wriggle room to amend its interest rate path if the economic outlook deteriorates after implementing the sharpest policy tightening in a generation.
“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,” Reserve Bank of Australia (RBA) governor Philip Lowe said after raising rates by 50 basis points for a third straight month.
The size and timing of future hikes will be “guided by the incoming data”, he added.
The currency declined and bonds rallied as the market interpreted Mr Lowe’s statement as an echo of United States Federal Reserve chief Jerome Powell’s move to give himself more flexibility on policy.
Yields on the 10-year government bond tumbled by 10 basis points to 2.95 per cent, the Australian dollar fell below 70 US cents and the benchmark stock index erased losses.
“While the language and sentiment are not new, the emphasis appears a little stronger in laying the groundwork back to a more modest pace of tightening,” said Ms Ong Su-Lin, chief economist for Australia at Royal Bank of Canada.
The RBA has rapidly tightened policy, having raised rates by 175 basis points since May, joining global counterparts from Washington to Wellington in trying to prevent consumer prices from spiralling out of control. Headline inflation in Australia in the last quarter was running at twice the top end of the central bank’s 2 per cent to 3 per cent target.
The RBA provided some forecasts from its quarterly update due to be released on Friday (Aug 5). It sees:
• Inflation at around 7.75 per cent in 2022, a little above 4 per cent in 2023 and around 3 per cent in 2024
• Gross domestic product growth of 3.25 per cent in 2022 and 1.75 per cent in each of the following two years
• Unemployment to be around 4 per cent at the end of 2024
Mr Lowe is confident that the economy can cope with the sharp tightening cycle as households remain cashed up from pandemic-era stimulus and unemployment is at a 48-year low of 3.5 per cent.
How household spending holds up “against a backdrop of higher inflation and falling house prices – the negative wealth effect – versus savings and wealth buffers” will be crucial to how high and fast the cash rate rises, said Ms Eleanor Creagh, senior economist at PropTrack.
“This dynamic will also be a key source of uncertainty for the housing market and the pace and depth of price falls,” she added.
Higher rates feed straight through to Australian borrowers, most of whom are on variable-rate mortgages. The RBA has signalled that it is trying to get the cash rate to around 2.5 per cent, or a neutral level, while money markets are pricing in 3.1 per cent by the end of the year.