Is the RBA crazy to slow down the pace of rate hikes?

Wed 05 Oct 22, 2:58pm (AEST)
RBA - Reserve Bank of Australia building name on black stone wall in the center of Sydney NSW Australia
Source: iStock

Key Points

  • The RBA has opted for a more timid 0.25% hike this month, taking the cash rate to 2.6%
  • The RBA wants more time to assess the impact of rate hikes so far

Global central banks will watch the RBA from the rear-view mirror after Governor Lowe bucked the trend of supersized rate hikes on Tuesday, opting for a smaller-than-expected 25 basis points instead.

Despite being an outlier, there's seemingly more positives about taking the foot of the pedal. At least for now.

Global rates and inflation at a glance


Core CPI

Cash rate

Latest hike




25 bps

New Zealand



50 bps




75 bps

United Kingdom



50 bps

United States



75 bps

Latest core inflation and cash rates from major economies (Table: Market Index)

Why it makes sense to slow down

There's a lag between hikes and economic data

"Higher inflation and higher interest rates are putting pressure on household budgets, with the full effects of higher interest rates yet to be felt in mortgage payments," said Governor Lowe.

Instead of stepping on the gas pedal with more 50 bp rate hikes, Lowe said they will instead "closely monitoring the global economy, household spending and wage and price-setting behaviour."

Australians are more vulnerable to high interest rates

Unsurprisingly, Australians are highly leveraged to the housing market and sensitive to rising interest rates. More than 80% of new loans in 2020 were variable-rate mortgages, according to Bloomberg. This is great when rates are going up, and depressing when rates are going up.

mortgage product interest variability
Source: RBA

The Fed hikes until something breaks

"The Fed has an unfortunate tendency to continue raising rates until there is a crisis (which are not all its own making but some are). There is no logical reason for the RBA to follow the Fed into that," said AMP Capital's Chief Economist Shane Oliver.

Fed hikes and crisis
Source: AMP

What now?

Slowing the pace of tightening is not the same as a full blown pivot. The RBA can and will continue to tighten rates moving forward.

"We think the RBA is placing a higher priority on balancing growth and inflation, but appears an outlier versus other central banks. This raises the hurdle to outsized moves in the near-term even on strong CPI data. We look for 25 bps moves in November and December," said Bank of America analysts.

Although, the RBA's dovish views now mean we're closer to the top of the tightening cycle. Commonwealth Bank analysts said "we expect the RBA to raise the cash rate by 25 bp at the November Board meeting and we retain our view that the terminal rate will be 2.85%."

The bond market has also taken a sharp pullback, with RBA rate futures expecting rates to peak at 3.57% in July, down from a little over 4% a few days ago.

Written By

Kerry Sun

Content Strategist

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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