RBA Hikes Key Rate By 25 Bps; Rates To Rise Further

Australia’s central bank raised its benchmark interest rate on Tuesday, for a second consecutive meeting and repeated the guidance that rates will be lifted further based on incoming data.

The policy board of the Reserve Bank of Australia, headed by Governor Philip Lowe, decided to lift the cash rate target by 25 basis points to 2.85 percent, the highest since 2013.

In the October meeting, the bank had raised the rate by a smaller-than-expected 25 basis point after half-a-percentage point increases in each of the last four meetings.

The board increased interest rates materially since May to establish a more sustainable balance of demand and supply in the domestic economy to help return inflation to target, the RBA said in the statement.

The bank reiterated that policymakers expect to increase interest rates further over the period ahead.

The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labor market.

Lowe said the board’s priority is to return inflation to the 2-3 percent range over time and policymakers are seeking to do this while keeping the economy on an even keel.

The central bank expects inflation to peak at around 8.00 percent later this year instead of 7.75 percent estimated earlier.

Inflation is forecast to slow thereafter due to the ongoing resolution of global supply-side problems, recent declines in some commodity prices and slower growth in demand.

The bank’s central forecast is for CPI inflation to be around 4.75 percent over 2023 and a little above 3.00 percent over 2024.

Economic growth is expected to moderate over the year ahead as the global economy slows, the bounce-back in spending on services runs its course, and growth in household consumption slows due to tighter financial conditions, the RBA said.

The growth outlook was downgraded to around 3 percent this year and 1.5 percent in 2023 and 2024.

JP Morgan economist Ben Jarman expects a 25 basis points hike in December before an extended pause. “The higher rates go, the higher the hurdle the data have to clear to justify ratcheting back up to 50s,” the economist said.

The interest rate is set to peak at 3.85 percent by April, though a more pronounced slowdown in economic activity is likely, resulting in a faster decline in inflation, Capital Economics economist Marcel Thieliant said. The economist expects rate cuts by the end of next year.

The Reserve Bank Board will make sure that this episode of high inflation is only temporary, Lowe said in a speech in Hobart.

The banker said the board’s base case remains that interest rates will need to go higher and the bank is not on a pre-set path. “If we need to step up to larger increases again to secure the return of inflation to target, we will do that,” said Lowe.

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