The nation’s central bank has reacted to concerns about the pace of interest rate rises with a softer-than-expected decision, lifting the official cash rate 25 basis points to be 2.6 per cent.
The nation’s central bank has slowed its tightening cycle, lifting the official cash rate 25 basis points to be 2.6 per cent.
“The cash rate has been increased substantially in a short period of time,” Reserve Bank of Australia governor Philip Lowe said.
“Reflecting this, the board decided to increase the cash rate by 25 basis points this month as it assesses the outlook for inflation and economic growth in Australia.
“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.”
The bank said inflation would increase further in months ahead, and then decline.
“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,” the statement said.
“Medium-term inflation expectations remain well anchored, and it is important that this remains the case.”
Mr Lowe said the global outlook had deteriorated recently and would add to uncertainty.
Also adding to uncertainty would be the response of household spending.
Inflation was 6.1 per cent in the year to June across Australia, and 7.4 per cent in Perth.Those levels are well above the Reserve Bank of Australia’s 2 to 3 per cent target range.
The ASX200 had traded up 2.5 per cent today to be 6,621 points in anticipation of the decision.
It surged almost 0.95 per cent more to be 6,679 points in the minutes after the RBA's announcement, before finishing at 6,699.3 (up 3.7 per cent).
Commonwealth Bank Group economists said they expect the Reserve Bank to lift the cash rate another 25 basis points at the November Board meeting to 2.85 per cent and then pause.
"However, we do see a risk that the final resting point could be slightly higher at 3.10 per cent," the bank said.
The bank said the sharemarket was already pricing in slower growth.
"When the slowdown arrives in earnest and rates look to have peaked, then the sharemarket will price in the economic recovery," the bank said.
"But each tightening and easing cycle is different. Investors must remain alert.
"Today has been a good day for the sharemarket, but there are plenty of hurdles ahead.
"While a recession is not expected in Australia, the same can’t be said for the US and Europe."
Housing pressure
It comes as St George Economics warned this morning that the housing market downturn has a way to go.
House prices were continuing to fall.
“While in monthly terms the pace of house price falls eased to 1.4 per cent in September, house prices declined by 4.1% over the September quarter,” the bank said in a research note.
“This was the sharpest quarterly decline since December quarter 1980.”
St George said it expected the cash rate will reach 3.5 per cent by early next year.
The timing of a slowdown will depend on how long the RBA needs to continue to tighten its interest rate stance, the bank said.
“However, we do not expect the downturn to turn into a freefall,” the bank said.
“The continued strength in the labour market and robust household balance sheets, coupled with the gradual recovery in population growth, will likely put a floor under the price declines.”
Worries
Earlier, some analysts were worried that the rapid pace of policy tightening will push Australia into recession, and were calling for the central bank to pull back.
AAP reported some economists had growing concerns about aggressive hikes plunging the economy into a recession.
Many experts were forecasting another supersized 50 basis point hike, although a smaller 25 basis point lift had not been ruled out.
The Reserve Bank of Australia has indicated it is getting closer to a "neutral" rate, which is where monetary policy is neither stimulatory nor contractionary.
AMP Capital's Shane Oliver said the fastest rate hiking cycle since 1994 risked throwing the economy into a "recession we don't have to have".
He told AAP that Australia had much higher levels of debt than in the mid-nineties, meaning households are much more sensitive to rate hikes.
Dr Oliver also said higher mortgage repayments take a few months to show up in bank accounts, and even longer for people on fixed rates who will feel the impact in one large hit.
As such, Dr Oliver was going against the consensus of a 50 basis point hike and anticipating a 25 basis point lift.
"If the RBA do hike by 50 basis points today, they will certainly slow down after that, as they have indicated they are aware they have moved fast already and rate hikes act with a lag," he said.
