RBA Raises Rates by a Further 25 Bps; Maintains Hawkish Guidance – Morningstar

By James Glynn
SYDNEY–The Reserve Bank of Australia continued to raise interest rates at a cautious pace this month despite data showing inflation ran at its fastest pace in 32 years in the third quarter, with more dire numbers likely in coming months.
The RBA on Tuesday raised the official cash rate by 25 basis points to 2.85%, while indicating a willingness to continue moving rates higher in coming months.
"The Board has increased interest rates materially since May. This has been necessary to establish a more sustainable balance of demand and supply in the Australian economy to help return inflation to target," RBA Gov. Philip Lowe said in a statement.
"The Board expects to increase interest rates further over the period ahead. It is closely monitoring the global economy, household spending and wage and price-setting behavior," Mr. Lowe added.
The RBA also revised up its expectations for the peak in annual inflation to around 8% in the fourth quarter of this year, from an earlier forecast of 7.75%. The bank’s central forecast is for the consumer-price index to rise around 4.75% over 2023 and a little above 3% over 2024.
The central bank revised down GDP growth forecasts for 2023 and 2024 to around 1.5%.
The RBA slowed the pace it was raising interest rates in October, becoming the first of the major central banks to pivot away from supersized increases. It has since been followed by the Bank of Canada.
The RBA has tightened the policy screws by 275 basis points since May. Markets expect the cash rate to rise above 4.00% by the end of 2023 and for annual inflation to peak at well above 8.0% by the end of this year.
Some economists had called for the RBA to reaccelerate the pace of hikes this month, citing higher-than-expected inflation in the third quarter and a big jump in inflation expectations in recent weeks.
But the RBA has argued it can move in smaller increments given that its policy-making board meets more frequently than most of its global counterparts, allowing it to still tighten at speed if it desires.
"The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that," Mr. Lowe said.
The Australian economy continues to grow solidly, supported by strong consumer spending and unemployment at a 50-year low. Still, growth is expected to slow quickly next year as tighter policy settings take effect.
House prices are falling quickly, posing some risk to financial stability over time, while consumer sentiment is at levels consistent with a recession. The problems associated with soaring living costs are expected to get worse before it gets better.
"The Board recognizes that monetary policy operates with a lag and that the full effect of the increase in interest rates is yet to be felt in mortgage payments. Higher interest rates and higher inflation are putting pressure on the budgets of many households," Mr. Lowe said.
Write to James Glynn at james.glynn@wsj.com
(END) Dow Jones Newswires
November 01, 2022 00:13 ET (04:13 GMT)
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