RBA becomes first central bank to slow pace of interest rate hikes

(Alliance News) - Australia's central bank raised it key interest rate by 25 basis points on Tuesday, coming in below market consensus and putting an abrupt end to its streak of four half percentage point rises in-a-row.

The Reserve Bank of Australia sought a "sustainable balance", as it raised the cash rate target by 25 basis points to 2.60%.

It also increased the interest rate on exchange settlement balances by the same amount to 2.50%. The interest rate increases will help achieve a "more sustainable balance" between supply and demand in Australia's economy.

FXStreet-cited consensus had been expecting rates to increase to 2.85%.

"The RBA became the first major central bank to slow the pace of tightening overnight, hiking rates by only 25 basis points against expectations of another 50. After four consecutive super-sized hikes, the RBA determined it can start to ease off the brake and is on course to hit its inflation target over the medium term," Oanda analyst Craig Erlam said.

"Of course, this had nothing to do with weak PMI surveys but it will probably assist the narrative that a global deceleration in rate hikes is underway, which could boost risk appetite further. Markets do love to set themselves up for disappointment. The jobs report on Friday could quickly put an end to that."

The US Institute for Supply Management's manufacturing PMI on Monday weakened to 50.9 points for September, just above the 50.0 neutral mark, from 52.8 in August.

Governor Phillip Lowe said: "As is the case in most countries, inflation in Australia is too high. Global factors explain much of this high inflation, but strong domestic demand relative to the ability of the economy to meet that demand is also playing a role."

It forecasts the consumer price index to reach around 7.75% over the year, before easing to "a little over 4%" in 2023, and then around 3% in 2024.

"The expected moderation in inflation next year reflects the ongoing resolution of global supply-side problems, recent declines in some commodity prices and the impact of rising interest rates," Lowe continued.

The bank expects 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 labour market," said the governor.

Rabobank said the move was a major boost to Aussie stocks. Australia's S&P ASX 200 index closed 3.8% higher on Tuesday.

"It may also have brought relief to other 'smaller' G10 central banks who have been caught up in rush of large incremental rate hikes in recent months probably designed to prevent their currencies falling too far against the mighty US dollar," it continued.

SPI Asset Management's Stephen Innes added: "While inflation has yet to peak in Australia, the RBA's more cautious hiking pace indicates that it is prepared to wait for the effects of monetary policy tightening already enacted to emerge more fully.

Innes noted the "more rational approach" could see other central banks move away from their recent hawkish tone.

"That implies bull steepening in bond markets and should provide some support for equity markets if other central banks follow suit," he added.

By Paul McGowan; [email protected]

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