RBA Board of Governors review: rate hike cycle to continue
2022-12-09
■ RBA raises policy rate to 3.10% and hints at additional rate hikes in the future
■ Some in the market had expected a halt to the rate hike cycle in the first half of next year, but such views have receded.
At its Board of Governors meeting on 6 December, the Australian Central Bank (RBA) raised its policy rate by 25 bps to 3.10%, in line with market expectations. This brings the cumulative policy rate increase to 3% since the start of rate hikes in May this year.
Some in the market believed that the rate hike cycle would stop at this meeting at the earliest, or that the rate hike cycle would stop in the first half of next year.Against this backdrop, the market's view of the rate hike cycle has been revised, with the statement released after the Board meeting confirming language suggesting additional rate hikes (The Board expects to increase interest rates further over the period ahead), as in previous meetings.The RBA also reiterated its policy of ensuring flexibility, saying that "there is no set course (it is not on a pre-set course)".
The background to the preliminary speculation of an early halt to the rate hike cycle was provided by the most recently released economic indicators: Australian retail sales fell by 0.2% month-on-month in October, contrary to market expectations and the first negative reading in 10 months, confirming the point that high prices and rising interest rates are beginning to have an impact on consumer spending.In addition, the rate of increase in the Australian Consumer Price Index (CPI) slowed to 6.9% y/y in October, leading the market to believe that price increases were reaching their peak. However, the 3.1% year-on-year increase in the wage index in the July-September period was the highest in nearly a decade, indicating continued wage growth.
As a result of these economic indicators, the statement now includes a new outlook for a future slowdown in household spending (Household spending is expected to slow over the period ahead).Meanwhile, the importance of avoiding a price-wages spiral (Given the importance of avoiding a price-wages spiral) was also mentioned. This is seen as one of the reasons behind the continuation of additional interest rate hikes.The above is interpreted as more caution about economic slowdown and rising prices than after the November meeting, and the RBA is likely to proceed with a policy of raising interest rates at the next meeting in February next year, even at the expense of the economy to some extent. At the time of writing, the short-term money market is factoring in the view that interest rates will rise to around 3.6% by July next year and then start to fall in the second half of 2024.