RBA Sees No Evidence Monetary Policy Is More Potent in Australia

Australian mortgages are more sensitive to higher interest rates than those in other advanced economies, the Reserve Bank said, while adding that this doesn’t imply that monetary policy is more potent.

(Bloomberg) — Australian mortgages are more sensitive to higher interest rates than those in other advanced economies, the Reserve Bank said, while adding that this doesn’t imply that monetary policy is more potent.

A higher share of variable-rate mortgages make Australia more susceptible to policy adjustments, the RBA said in its quarterly statement on monetary policy released Friday.

“Despite this, there is no evidence that the overall potency of monetary policy is any stronger in Australia,” the RBA said. That’s because there are “other important channels” for transmission such as the exchange rate and household cash flows.

In countries like Australia and New Zealand, most fixed-rate mortgages re-price at market rates within two years. By contrast, new mortgages in the US are typically taken out for fixed terms of 30 years, meaning policy adjustments have little impact on existing borrowers.

“Cross-country analysis of the overall strength of monetary policy that includes Australia is limited, but the available evidence suggests that the effect of Australian monetary policy on activity and inflation is similar to that in other comparable advanced economies,” the bank said.

The RBA has increased interest rates by 3.25 percentage points since May and  expects to tighten policy further to crush the hottest inflation in more than three decades. In today’s statement, the bank boosted its forecast for core inflation this year, underscoring the need for even higher borrowing costs.

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