Reserve Bank of Australia (RBA) Governor Philip Lowe said interest rates are likely to rise by 50 basis points at most next month, prompting money markets to scrap bets that he would track the US Federal Reserve with a 75 basis-point move.
In a speech delivered yesterday shortly after the central bank released findings from a review of its yield target, Lowe also said the bank is unlikely to use the policy again after a “disorderly” exit late last year that hurt its reputation.
The governor said that Australians should gird for higher borrowing costs as inflation is expected to be 7 percent in the final three months of the year.
Photo: Bloomberg
The RBA surprised markets two weeks ago when it raised rates by a half point, following new information showing inflation quickening.
Lowe was asked directly after his speech whether 75 basis points was on the table and responded that, like this month, the board would only be considering a rise of 25 to 50 basis points next month.
The RBA is to receive second-quarter inflation data late next month, as well as updated quarterly economic forecasts from its staff ahead of the Aug. 2 policy meeting. That new information could change its assessment of the size of hikes needed to rein in inflation.
Australian overnight-indexed swaps for next month yesterday fell seven basis points to 1.3 percent, pricing in better than 95 percent odds for a 50 basis point move. In the meantime, bonds perked up, with three-year yields declining to 3.57 percent, down from the 3.69 percent touched earlier yesterday.
The premium 10-year Aussie yields offer over similar-dated Treasuries shrank four basis points to 80 basis points.
Economists say Australian policymakers remain behind the curve compared with counterparts such as the Fed, with money markets pricing in an RBA cash rate of about 3.6 percent by the end of the year. Such an aggressive pace of tightening could push Australia’s A$2.2 trillion (US$1.54 trillion) economy into recession.
Asked about recession risk, Lowe pushed back on such forecasts, highlighting household consumption, record terms of trade and unemployment being near a 50-year low.
Last month’s meeting minutes released shortly after Lowe’s speech echoed that view.
“Many households had built up large financial buffers during the pandemic and the household saving rate was very high,” they said. “The central scenario, which was conditioned on the assumption of further rate rises, was for strong household consumption growth over the remainder of the year.”
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