The Reserve Bank of Australia today lifted the cash rate target by 0.25%, to 2.6%, undercutting market predictions of a sharper 0.5% hike and signalling a slowdown of the central bank’s inflation-busting strategy.
At its monthly meeting, the RBA board determined yet another 50 basis point uptick to the cash rate was unwarranted, as the full effects of its prior hikes are yet to be observed in the inflation rate.
While the latest official figures put yearly inflation at 6.1%, far above the central bank’s 2%-3% target band, the board said a new 25 basis point increase was prudent given the sharp increases of the past six months.
“The cash rate has been increased substantially in a short period of time,” the RBA said in a statement.
“Reflecting this, the board decided to increase the cash rate by 25 basis points this month as it assesses the outlook for inflation and economic growth in Australia.”
This ‘wait and see’ approach from the central bank defied market predictions of a 50 basis point increase.
Westpac economists had pegged their rate hike expectations to 50 basis points, pointing to RBA governor Philip Lowe’s comments before a September parliamentary inquiry as evidence that further 50 basis point increases are likely.
Of particular note was Lowe’s assessment that consumers are more willing than expected to accept higher prices for goods than they have been in the past, feeding into the inflationary cycle.
ANZ also predicted today’s rise would come in at the 50 basis point mark, pointing to strong household spending patterns and Australia’s robustly low unemployment rate.
Given those lingering concerns, the RBA maintained further cash rate hikes are likely in the months ahead, with the central bank “seeking to do this while keeping the economy on an even keel”.
“The path to achieving this balance is a narrow one and it is clouded in uncertainty.”
The 25 basis point increase also assuages fears from some corners of the market that yet another 50 basis point increase could cut too drastically into business and household budgets, crushing consumer spending and precipitating a recession.
Certainly, Australia’s powerbrokers are concerned about economic downturns: speaking to The Australian Financial Review, Treasurer Jim Chalmers recently aired the prospect of recessions hitting many advanced economies has turned from “possible” to “probable”.
Backdropped by those concerns, industry figures have welcomed Tuesday’s softer-than-expected increase.
“With the RBA embarking on its most aggressive tightening cycle for many years, it must be mindful not to go too hard, too fast,” said Australian Chamber of Commerce and Industry CEO Andrew McKellar.
“As such, it’s appropriate that the central bank slows its rate of tightening to ensure there is time to judge what the feedback effects are on the economy.”
Senior Business Journalist
Focused on the small business sector, David’s work covers the political, regulatory, and economic issues facing Australian entrepreneurs. Prior to joining SmartCompany, he was a reporter for Business Insider Australia. You can follow him on LinkedIn.
