Australia in ‘Third Phase’ of Policy Tightening, RBA’s Kent Says

Australia’s central bank is in its “third phase” of monetary policy tightening as it assesses the impact of interest-rate rises to date, a senior Reserve Bank official said, adding further moves may still be needed.

(Bloomberg) — Australia’s central bank is in its “third phase” of monetary policy tightening as it assesses the impact of interest-rate rises to date, a senior Reserve Bank official said, adding further moves may still be needed. 

The current stage is “an opportunity to see how the economy and how the data is evolving,” RBA Assistant Governor Chris Kent said at Bloomberg’s office in Sydney on Wednesday. The rate-setting board will be focused on global developments, trends in household spending and the outlook for inflation and economic activity when deciding the next move, he added.

“It’s important to recognize because inflation is such a problem, high inflation, for all Australians, it’s important to try and get inflation back into the target in a reasonable timeframe,” Kent said. The RBA currently predicts it to return within the 2-3% range in late 2025, with updated forecasts due next month.

Kent’s comments come amid expectations the RBA, like global peers, is nearing the end of its tightening campaign, having paused at the past four meetings with the cash rate at an 11-year high of 4.1%. Economists expect it to hike once more to 4.35%, while money markets see a about 50% chance of a move.

When asked after his speech titled “Channels of Transmission” whether the RBA board discussed actively selling bonds in the market, or quantitative tightening, Kent said it was “under review.” He pointed out that movements in long-term bond yields have less of an impact in Australia than in the US. 

“We don’t have any current plans to sell bonds to pursue what’s called active QT at the moment,” he said, adding that if the RBA was to sell bonds, it would want to do it in a way that wasn’t disruptive to markets.

“The board’s also conscious of the fact that our large portfolio share still on the balance sheet implies interest rate risk that they need to think carefully about. It’s not about financial conditions,” Kent said.

In his speech, the assistant governor said the RBA’s 4 percentage points of rate hikes are working to cool inflation, though lags in transmission mean the full effects are still to be felt.

As the hikes since May 2022 work their way through the economy, they “will provide further impetus to lower inflation in the period ahead,” he said.

Since May last year, household mortgage payments – interest plus scheduled principal repayments – have risen to almost 10% of household disposable income from around 7%. 

“This is above estimates of the peak reached in 2008 when the cash rate was 7.25%,” Kent said. “Required mortgage payments are at a record share of household disposable income and will rise further as more fixed-rate loans expire,” he said.

Kent said factors such as a rising population and a supply crunch were pushing Australian house prices higher, leading to a wealth effect that could potentially drive stronger consumer spending. Still, he said, “there are so many other features weighing on consumption at the moment.”

Roughly half of loans that were fixed at ultra-low rates during the pandemic have already rolled off onto higher rates since the central bank began tightening around 18 months ago, with most borrowers managing the transition well, RBA research published last week showed. 

Data on Australia’s A$2.3 trillion ($1.5 trillion) economy has been mixed. 

Figures out Tuesday showed businesses are coping better with higher borrowing costs than households, with consumer sentiment in “deeply pessimistic” territory. The labor market has proved resilient with the unemployment rate hovering near its lowest level since the 1970s over the past year.

Economists and financial markets are keeping a close eye on third-quarter inflation data due out later this month which will help cement expectations for the RBA’s Nov. 7 meeting. Kent cautioned that policymakers will look at more than just consumer prices.

“The CPI is important, it’s the thing we are targeting,” he said. “But it’s not the only thing we’re going to be looking at. We have to put it together against the pictures of what’s happening in the labor market, what’s happening to the household sector.”

“I don’t like to suggest that there’s just one thing and one threshold and it’s a done deal. It’s much more putting the whole picture together.”

(Adds comments from Q&A.)

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