The RBA Board took stock of its tightening cycle at today's meeting and elected to scale back to a 25bps rate hike after a sequence of four 50bps rate hikes in succession, lifting the cash rate target to 2.6% and the Exchange Settlement rate to 2.5%. Although the Board expects further hikes are likely, the effort to frontload the pace of monetary policy tightening looks to have run its course.
As had been foreshadowed over recent weeks, the downshift in the pace of RBA rate hikes has come, with Governor Philip Lowe noting in his decision statement that rates had risen "substantially in a short space of time" and the Board now needed to reassess the implications for inflation and growth. Including today's decision, the RBA has hiked rates by 250bps since April, a pace not vastly different to the Fed's hiking cycle (300bps since Janauary). But with rates now in the RBA's estimated range for the neutral setting for the cash rate (2½ to 3½ per cent) and therefore no longer providing accomodative support to the economy, the Board is taking a more balanced view of the risks in front of it.
Today's statement reaffirmed the Board's focus on ensuring medium-term inflation expectations remain in line with its 2-3% target amid risks from rising labour costs in a strong labour market and increased pricing power by firms. From a growth perspective, Governor Lowe sounded caution from a deteriorating global backdrop and over uncertainty as to how household spending in Australia will hold up as the effects of the earlier rate hikes flow through.
In looking ahead, Governor Lowe noted the Board expects to keep hiking rates "over the period ahead", with supply and demand needing to come into closer alignment to lower inflation. Following today's decision, market pricing for the terminal rate has been cut from around 4% pre-meeting to around 3.5%. Provided the RBA can keep inflation expectations anchored between 2-3%, the argument for rates to rise into restrictive territory (higher than market pricing has now adjusted to) is diminished.
