Australia’s central bank is approaching a point when a pause in its policy tightening cycle will be needed, Governor Philip Lowe said, a day after raising interest rates to the highest level since 2012.
(Bloomberg) — Australia’s central bank is approaching a point when a pause in its policy tightening cycle will be needed, Governor Philip Lowe said, a day after raising interest rates to the highest level since 2012.
“With monetary policy now in restrictive territory, we are closer to the point where it will be appropriate to pause interest rate increases to allow more time to assess the state of the economy,” Lowe said in a speech in Sydney Wednesday. “At what point it will be appropriate to pause will be determined by the data and our assessment of the outlook.”
The governor’s remarks sent the currency and government bond yields lower, with the 10-year yield dropping as much as 7 basis points to 3.62%. Traders are now betting there’s about a 50% chance of a pause in tightening next month.
The Reserve Bank is waging its most aggressive campaign against inflation in a generation, having hiked by 3.5 percentage points from a record low 0.1% in May. Money markets are pricing in a peak rate of 4% this year, suggesting at least one more quarter-point hike to come.
Lowe’s more measured tone contrasts with Federal Reserve Chair Jerome Powell, who overnight opened the door to raising rates higher and potentially faster than previously anticipated.
The RBA chief, in his speech at an Australian Financial Review conference, said the environment in which the rate-setting board is making decisions is complex, “with many of the variables we monitor at near record highs or lows.” He also reiterated a desire to engineer a soft landing in the economy and pointed out that the board was managing dual risks.
“One is the risk of not doing enough, which would result in high inflation persisting and then later proving very costly to get down,” he said. “The other is the risk that we move too fast, or too far, and that the economy slows by more than is necessary to bring inflation down in a timely way.”
Recent figures showed a surprisingly weaker end to 2022 as economists boosted the probability of a recession in Australia to a better than a one-in-three chance. A new monthly CPI indicator also suggested that inflation has peaked while the unemployment rate has edged up to 3.7% from a near 50-year low of 3.4%.
Lowe said the board is monitoring the data “very carefully month to month” and that the central bank has the flexibility to respond as needed.
Even so, he reiterated that further policy tightening is likely to be required to bring inflation back to the RBA’s 2-3% target “within a reasonable timeframe.” The bank’s own forecasts, published last month, show headline inflation will hit the top of its range only in mid-2025, from 7.8% last quarter.
“Inflation is still too high,” Lowe said. “If we don’t get inflation down fairly soon, the end result will be even higher interest rates and more unemployment.”
The governor’s pause signal will be a welcome reprieve for Australia’s center-left government which is trying to keep fiscal and monetary policy aligned to slow inflation. Treasurer Jim Chalmers says his May budget will focus on “relief, repair and restraint.”
–With assistance from Garfield Reynolds.
(Updates with market reaction in third paragraph.)
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