Reserve Bank eases pace of hikes as pain grows

Having delivered a shock-and-awe campaign of hefty interest rate increases since May, the central bank chose to slow the pace of policy tightening at its latest board meeting.

Having delivered a shock and awe campaign of massive interest rate increases since May, the Reserve Bank chose to slow the pace of policy tightening at its board meeting on Tuesday, in part to ease growing pressure on the country’s highly indebted housing sector.

Interest rates have risen at a record speed since May and, given the backdrop of a rapid deterioration in the global economic outlook, the case to go slower was made crystal clear.

The RBA surprised many by raising the official cash rate by just 25 basis points, instead of the 50-basis-point increase anticipated in money markets. The official cash rate now stands at 2.6 per cent, up from 0.1 per cent at the start of May.

The case for a more cautious policy approach had been evolving in the RBA’s guidance since early September, but the message got a little lost, as the intervening weeks saw major global central banks announce super aggressive interest rates increases and warn of coming recessions.

But for the RBA, it was concern over the pace of interest rate increases since May, rather than the outright level of the official cash rate, that prompted the move to a smaller increase.

The RBA, led by Philip Lowe, surprised many by raising the official cash rate by just 25 basis points instead of the 50-basis-point increase anticipated in money markets.Picture: Monique Harmer/NewsWire

If the RBA delivers 25-basis-point increases in both November and December – a scenario that now seems highly plausible – it will have cranked the official cash rate up by a total of 300 basis points in the space of only eight months.

That is a blistering pace of tightening that will be felt acutely by a huge number of mortgage borrowers over coming months.

Continuing at that speed would have invited the spectre of recession next year. In late 2023, a large group of mortgage holders with fixed interest rates will convert back to much higher variable interest rates.

Economists have warned the shift could prove to be a flash point for the housing sector and the economy more broadly.

The RBA has also estimated that about a third of households have very little if any financial buffers to deal with jumping interest rates.

But, the reasons for adopting a more cautious policy approach go beyond just the growing stress in the housing sector.

The RBA is growing more confident that inflation will fall quickly next year, as the world economy slows and commodity prices retreat.

The global growth engines of China, the US and Europe are all misfiring for different reasons, stoking the likelihood of a deep global downturn.

Upheavals in global bond markets fanned by recent policy mistakes by the UK government have also done little to change the sense that the world economy is set to cool sharply.

Locally, soaring construction costs have been a big factor forcing up inflation, but that seems unlikely to be repeated over the next year as housing demand slows.

And critically, Australian wages aren’t growing at the stellar pace seen in places like the US Canada and the UK, giving the RBA scope to slow the pace of tightening now.

The big risk for the RBA in putting the brakes on the pace of interest rate increases this month is that third-quarter inflation data on October 26 could show an upward surprise.

If that happens, the RBA is likely to be sensible and announce a return to big monthly interest rate increases.

But for now, the RBA knows that the policy guns it has fired so far this year will have a big impact on the economy, and that extending the campaign of huge monthly rate rises makes little sense.

The Wall Street Journal