RBA pivots, slows hikes

The Reserve Bank of Australia (RBA) has announced a 25-basis-point (bp) rate hike, taking the official interest rate to 2.60 per cent.

With global inflation running extremely high and local inflation now predicted to surpass 7 per cent by the end of the year, the RBA was widely predicted to hike rates by another 50 bps on Tuesday in a move to normalise monetary conditions in Australia.

But it now appears that the RBA has reached a point at which it feels a pivot to a slower pace of monetary tightening is justified.

“The cash rate has been increased substantially in a short period of time. Reflecting this, the board decided to increase the cash rate by 25 basis points this month as it assesses the outlook for inflation and economic growth in Australia,” governor Philip Lowe said.

Reiterating the bank’s central forecast for CPI inflation at around 7.75 per cent over 2022 and a little above 4 per cent over 2023, Dr Lowe said Tuesday’s “further increase in interest rates will help achieve a more sustainable balance of demand and supply in the Australian economy”.

“This is necessary to bring inflation back down.”

While the “board expects to increase interest rates further over the period ahead”, the size and timing of future increases depend on developments in the global economy, household spending and wage and price-setting behaviour.

“The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that,” Dr Lowe said.

Just prior to the bank’s latest rate decision, AMP's Shane Oliver said that after five rate hikes in a row, the RBA “should be slowing the pace of rate hikes to be able to assess the impacts and allow for monetary policy lags”.

Last month, governor Lowe said that the case for “a slower pace of increase in interest rates becomes stronger as the level of the cash rate rises”.

However, as inflation continues to remain sticky in the US and currency movements make inflation harder to tame in Australia, many believed a 50-bp hike in October was almost certain.

The Commonwealth Bank (CBA), however, saw merit in a 25-bp hike this month.

CBA was out of step with Westpac, NAB and ANZ, as well as current market pricing, which all pointed to a 50-bp increase to the cash rate.

“We believe the domestic backdrop does not warrant another super-sized rate hike, particularly given the RBA has recently acknowledged that, ‘the full effects of higher interest rates [are] yet to be felt in mortgage payments’,” CBA head of Australian economics, Gareth Aird, said earlier this month.

While a recent upside surprise in US inflation data saw market pricing for the RBA’s October decision shift in favour of a 50-bp rate hike, Mr Aird said that markets appeared to have already dismissed earlier comments made by RBA governor Philip Lowe.