Is the RBA crazy to slow down the pace of rate hikes?
Global central banks will watch the RBA from the rear-view mirror after a timid 25 bp hike.
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
Country | Core CPI | Cash rate | Latest hike |
|---|---|---|---|
Australia | 6.20% | 2.60% | 25 bps |
New Zealand | 6.20% | 3.50% | 50 bps |
Canada | 5.80% | 3.25% | 75 bps |
United Kingdom | 6.30% | 2.25% | 50 bps |
United States | 6.30% | 3.00% | 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.
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.
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.
