The Reserve Bank of Australia (RBA) yesterday raised its key interest rate for an eighth consecutive month and said it expects to tighten policy further as it seeks to cool the hottest inflation in three decades.
The Australian central bank increased its cash rate by a quarter-percentage points to 3.1 percent, the highest level since November 2012, at its final meeting for this year.
Yesterday’s widely anticipated decision brings the RBA’s cumulative hikes since May to 3 percentage points, the sharpest annual tightening since 1989.
“The board expects to increase interest rates further over the period ahead, but it is not on a pre-set course,” RBA Governor Philip Lowe said in his post-meeting statement. “The size and timing of future interest rate increases will continue to be determined by the incoming data.”
Australia has been an early mover in slowing the pace of tightening as the central bank tries to safeguard economic growth while reining in inflation that is forecast to touch 8 percent this quarter.
It was the first developed economy to downshift to quarter-point hikes in October and has signaled a potential pause ahead to assess the impact of moves so far.
In contrast, central banks in Wellington and Washington have tightened by 4 percentage points and 3.75 percentage points respectively in their cycles, and signaled a determination to slow consumer prices irrespective of the economic cost.
That explains why in Australia, money markets are pricing in a peak rate of about 3.6 percent by the middle of next year, which is in line with economists’ estimates.
New Zealand’s central bank late last month forecast a terminal rate of 5.5 percent next year and the US Federal Reserve is also expected to keep tightening.
“Today’s statement was a bit more hawkish than probably expected by the market,” said Tapas Strickland, head of market economics at National Australia Bank Ltd.
It “can be read as — if it comes to inflation and wages being inconsistent with getting back to target, the RBA is prepared to continue to hike even if that risks a greater slowing in activity,” Strickland said.
Yesterday’s hike, if passed on in full by banks, would push mortgage rates to 5.08 percent from just 2.4 percent in April — an outcome that might create “sticker shock” for borrowers, said Eliza Owen, head of research for property consultancy CoreLogic Inc.
“The higher rate environment will test housing market conditions in 2023,” she added.
So far, the pace of home prices declines in Australia has been orderly amid weak supply and rapidly rising immigration.
The governor yesterday reiterated that inflation was “too high,” even though a monthly indicator last week showed headline prices eased in October to 6.9 percent, compared with a median estimate of 7.6 percent.
The rate increases are still to filter through the economy, with GDP forecast to have surged 6.3 percent last quarter from a year earlier, though much of that reflects a low base effect due to COVID-19 lockdowns last year.
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