Economic News

Reserve Bank Of Australia Raises Rates Again

Reserve Bank of Australia raises rates again

The Reserve Bank Board should slow the pace of rate increases once it reaches its assessment of neutral. That is particularly because of the treacherous lags that will have built up as the inevitable result of such a sharp rate increase in rates, from 0.1% back in May.

The Governor has certainly indicated that intention, both in the speech to the Australian Business Economists on September 8 and in the Parliamentary hearing last Friday.

The scaling back to a slower pace of tightening could begin from the October meeting, with the cash rate having reached the neutral zone at 2.35%.

There has always been some uncertainty as to whether a starting point of 2.35% would be too far below the Governor’s assessment of neutral. He has argued in the past that the real neutral is at least zero, implying a 2.5% nominal rate given longer term inflation expectations. That is above the 2.35% starting point for the October meeting.

That 1% growth rate now has some downside risks but for now given the current momentum in the economy, it’s decided not to mark 2023 growth down any further. It’s also noted that since the forecast is 1% growth rate in 2023 we have revised down our 2022 growth rate from4.4% to 3.4% meaning that the level of GDP by end 2023 will be considerably lower than we had expected when we first made the 1% growth forecast.

3.6% terminal rate as over-tightening but the growth rate required to achieve the objective of wringing inflation out of the system is consistent with the 3.6%. Given these extreme circumstances around the build up of inflationary pressures central banks will take the policy of least regret. Which will be to err on the side of containing inflation at the potential cost of growth in the near term.