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Australia’s central bank says hikes could slow at some point

Australia's central bank says hikes could slow at some point
© Reuters. Pedestrians walk past the main entrance to the Reserve Bank of Australia (RBA) head office in central Sydney, Australia, October 3, 2016. Picture taken October 3, 2016. REUTERS/David Gray/File Photo

SYDNEY (Reuters) -Australia’s central bank is set on raising interest rates again as it battles to contain red-hot inflation, but sees a case for slowing the pace of hikes as policy settings approached more normal levels.

Minutes of the Reserve Bank of Australia’s (RBA) September Board meeting out on Tuesday reiterated that policy was not on a pre-set path and would be balanced to try and keep the economy on an even keel.

“All else equal, members saw the case for a slower pace of increase in interest rates as becoming stronger as the level of the cash rate rises,” the minutes showed.

The central bank lifted its cash rate by 50 basis points to 2.35% at the Sept. 6 meeting, the fifth hike in as many months for a total increase of 225 basis points.

Markets are wagering on yet another half-point hike in October, in part to keep pace with the U.S. Federal Reserve, which is widely expected to lift its rates by 75 basis points this week.

RBA Governor Philip Lowe has flagged the chance of a slowdown in hikes at some point, but also underlined the importance in a very tight labour market of keeping inflation expectations anchored.

While wages have picked up as unemployment hit a 48-year low, board members said, the pace of wage growth remained consistent with the bank’s 2%-3% inflation target.

“Members noted that the rate of base wages growth so far had not reached levels that would be inconsistent with achieving the inflation target on a sustained basis.”

The emphasis on inflation and a hawkish outlook from the Fed has led Westpac chief economist Bill Evans to revise up his call on rates and he now sees a half-point move in October rather than 25 basis points.

He also looks for quarter-point hikes in November, December and February taking rates to a peak of 3.6%.

“Clear evidence of the expected slowdown in inflation will not be apparent until late February, allowing the RBA to go on hold in March on evidence that growth is slowing and that inflation and rates have also peaked in the U.S.,” said Evans.

Board members discussed whether or not to hike rates by 25 bps or 50 bps in September, noting that rates were approaching normal levels, the minutes showed.

“They acknowledged that monetary policy operates with a lag and that interest rates had been increased quite quickly and were getting closer to normal settings.”

Reactions were muted in local equity, debt and currency markets, though bonds rallied slightly and 10-year Australian government bond futures rose four ticks. The Australian dollar was steady at $0.6726.

Board members had also discussed the potential cost of higher rates to the central bank, the minutes showed.

“There is expected to be a financial cost to the Bank because the purchased bonds pay a fixed return, while the interest paid on the Exchange Settlement (ES) balances created to finance the bonds varies with monetary policy settings and so rises as monetary policy is tightened.”

“The ultimate cost will be known only once the last of the purchased bonds matures in 2033. Members noted that it is important to assess this potential cost in the context of the wider benefits to the economy that have flowed from the BPP (bond purchase programme) as part of the package of monetary policy measures.”

The RBA releases a review into the bank’s bond purchase program on Wednesday.

Source: Investing.com

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