The RBA Board hiked its key interest rates by 50bps at today's September meeting, raising the cash rate target to 2.35% and the rate on Exchange Settlement balances to 2.25%. Rates have now been hiked by 225bps since May, a pace of tightening exceeded only once since the introduction of inflation targeting in Australia, by the hiking cycle back in 1994 (275bps in 5 months). The RBA still has work in front of it with the Board expecting further rate hikes will be necessary "over the months ahead", though a downshift in the pace of hikes to 25bps increments could be on the table in October.
Rate hikes throughout this ongoing tightening cycle have been framed in terms of normalising monetary policy, after the cash rate was lowered to 0.1% in 2020 in response to the pandemic crisis. Following May's initial 25bps hike, the 4 consecutive hikes of 50bps that have followed have frontloaded the withdrawal of this support.
Today's decision statement from Governor Philip Lowe removed any reference to normalisation, suggesting the Board may now consider rates to be around neutral territory, a level for the cash rate no longer stimulatory for growth and inflation. We know from the July meeting that the Board is using the neutral rate framework as a guidepost to setting monetary policy and Governor Lowe's speech in late July told us that most estimates for the nominal neutral rate in Australia were "at least 2½% per cent".
If the above interpretation is close to the mark — more should be known on Thursday given Governor Lowe is delivering a speech titled 'Inflation and the Monetary Policy Framework' — then it suggests the Board may be open to a discussion to dialing down the pace of tightening to hiking in 25bps increments from October, consistent with market pricing. Repeated in today's statement was the line that rates are "not on a pre-set path" and that the Board was aiming to keep the economy "on an even keel" as it tightens policy to return inflation to the 2-3% target band.
The reaction function continues to centre on inflation expectations. Although inflation is forecast to slow over 2023 and 2024, the outlook is seen as fairly fragile in the sense that there had been signs wage pressures were building and the strength of the labour market meant they were likely to keep rising. Governor Lowe noted the Board will be alert to signs of second-round effects of high inflation coming through in price and wage-setting processes.
