Australia’s Central Bank Opens Door to Earlier Rate Rise, Pledges Patience

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Concluding its monthly policy meeting, the RBA kept the cash rate at a record low of 0.1% but dropped that target for the April 2024 government bond.

It also omitted a long-held projection that rates were unlikely to rise until 2024, saying a move in 2023 was now possible given inflation had moved back into its 2-3% target band two years earlier than forecasted.

The RBA would, however, continue to buy government bonds at a pace of A$4 billion ($3.00 billion) a week and emphasised that inflation was only expected to be at the middle of its target band by late 2023.

“The latest data and forecasts do not warrant an increase in the cash rate in 2022,” said Lowe, taking issue with market pricing. “The Board is prepared to be patient.”

The bank last week gave up any pretence of defending the bond target as yields flew to 0.73% and the market suffered one of its worst monthly drubbings in decades.

Investors are still wagering the central bank is behind the curve as futures are almost fully priced for a rise to 0.25% by May 2022, and for 1% by year end.

That is just part of a global sea change as surging energy costs and supply bottlenecks force central banks from Europe to North America to consider bringing forward tightening.

MAKE HASTE, SLOWLY

It is exactly 11 years since the RBA last raised rates, setting them at what would now be an unbelievably high 4.75%.

While the market has a series of hikes priced in, it does not see rates getting much above 1.75% in this cycle partly because households are far more indebted than in the past.

Wages growth in Australia has also lagged badly at an annual 1.7%, well below the 3%-plus policymakers believe is needed to keep inflation sustainably in the 2-3% band.

Yet super-low borrowing costs have managed to inflate a bubble in house prices which climbed almost 22% in the year to October, and by a quarter in Sydney.

The RBA has so far resisted calls to use rates to cool the market, arguing it would only slow the economy and cost jobs, but the main banking regulator has tightened lending standards.

“Macro-prudential tightening will act as a break on housing, and fiscal policy will also act as a drag,” said Frank Uhlenbruch, an investment strategist at Janus Henderson.

“Our view is that the tightening profile implied by the market risks triggering a major slowdown over 2023,” he added. “Faced with these uncertainties, we expect the RBA to make haste slowly, commencing a tightening cycle from mid-2023 onwards.”

For a look at all of today’s economic events, check out our economic calendar.

($1 = 1.3340 Australian dollars)

(Reporting by Wayne Cole; Editing by Sam Holmes)



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