The Reserve Bank of Australia was among the late entries to enter the interest rate rise race that has been going on among central banks since late last year. They have already raised rates four times from 0.10% to 1.85% and were expected to do so again, raising them by 0.50% this time.
Bond markets have modestly pared back expectations on how high the RBA will increase the cash rate and the AUD has been knocked lower as Europe’s energy crisis is turning the risk sentiment off, encouraging investors to stick with safer currencies. Commonwealth Bank forecasts that the RBA will pause its tightening for “at least a few months” when the cash rate reaches 2.85%.
“The data will indicate that there is no need to continue to take the policy rate higher,” said Gareth Aird, head of Australian economics at CBA. “Taking the cash rate higher would likely generate a hard landing in the economy.”
The RBA Monetary Policy Decision for September 2022
RBA raises cash rate by 50 bps to 2.35%, as expected
Prior cash rate was 1.85%
Committed to returning inflation to the 2-3% range over time
Inflation expected to increase further over the months ahead
Inflation is expected to peak later this year, then decline back towards 2-3% range
Central forecast is for CPI inflation to be around 7¾ percent over 2022, a little above 4 percent over 2023 and around 3 percent over 2024
Labour market is very tight, wages growth has picked up
Household spending remains an important source of uncertainty
Price stability is a prerequisite for a strong economy and a sustained period of full employment
Further rate hikes is expected but policy is not on a pre-set path
Full statement
There isn’t much in this that isn’t expected from the RBA. Markets have priced in a ~46 bps move coming into the decision, so this is fitting with expectations. There are no changes to the language and forecasts on inflation but the RBA added a line in the forward guidance to stress on ‘price stability’. They also removed the reference to ‘normalisation’, which may infer that rates are now in neutral territory.
But the language on rate setting is not changed, as expected, with the central bank maintaining that they will need to raise the cash rate further but reaffirming that policy is ‘not on a pre-set path’.
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