Finally, a central bank has the courage to break the pattern of large and monotonous hikes in interest rates. The Reserve Bank of Australia has effectively conceded the risks of overkill and opted for a smaller-than-anticipated increase. The fight against inflation is far from over, but we are starting to see some officials recognize there are costs to the rapid withdrawal of pandemic stimulus.
After four consecutive 50-basis-point boosts, the RBA lifted its benchmark rate by a quarter point Tuesday to 2.6%. Most economists had predicted officials would squeeze in one more half-point move before scaling back in November. While the bank stressed more increases are coming and that it remains resolute in its pursuit of returning inflation to the 2% to 3% target, the smaller increment was a striking departure from recent practice. The Aussie dollar slumped and yields on three-year bonds plummeted. The rally in Treasuries got a fresh lift, as did an upward march in Japanese stocks.
The RBA was pessimistic about the outlook for the global economy, which Governor Philip Lowe said “has deteriorated recently.” Officials also fretted about conditions at home. Household budgets are stretched and yet to feel the full effects of the six hikes undertaken this year. Most mortgages in Australia are on variable rates, which means they fluctuate with official rates, unlike in the US where a majority of homes are financed with fixed-rate loans. “Consumer confidence has also fallen and housing prices are declining after the earlier large increases,” Lowe said in the statement.