Australia prepares for aggressive stance on global product prices

Australia prepares for aggressive stance on global product prices

The central bank of Australia is about to resume a pause in interest rate increases, as the latest data pointing to slower house price growth and inflation suggests previous restrictive measures are gaining ground.

The Reserve Bank will keep its cash rate at a 12-year high of 4.35% on Tuesday, most economists predict, after making a protective increase last month to ensure inflation remains on track to return to its target. The RBA held firm at all other meetings in the second half of this year.

RBA Governor Michele Bullock, who has adopted an hawkish tone since taking office in mid-September, is likely to maintain that stance. She has warned that while inflation declined to the current level of around 5% fairly quickly, The next stretch towards the 2%-3% target is likely to be longer.

“The board does not want to tighten the policy even more”, but will do so if necessary, said Gareth Aird of the Commonwealth Bank of Australia. “For that to happen, there must be a clear signal in domestic economic data that the policy rate is not restrictive enough to bring inflation back to target.”

Australian authorities have been more cautious than their foreign peers, falling more than a percentage point short of the cumulative adjustment in the United States and New Zealand. As a result, the RBA is still fine-tuning its position, while the previously hawkish Federal Reserve has seen inflation fall more rapidly.

What this underlines is that markets are pricing in Federal Reserve cuts next year, while bets remain on a tightening by the RBA.

Swap traders are betting there is a 40% chance Australia will raise its key rate again by the middle of next year, in contrast to the Federal Reserve and European Central Bank, which are expected to have begun an easing cycle by then. . Markets assign a roughly 50% chance that New Zealand and the United Kingdom will also ease their policies by mid-2024.

By toughening its policies in only its second meeting on November 7, Bullock also polished his credentials in the fight against inflation. He maintained a tough stance at a forum in Hong Kong last Tuesday, expressing concern about the emerging effects of second-round inflation in Australia.

She was backed by her immediate predecessor, Philip Lowe, who on a separate panel argued that the world had entered a period of increased price volatility and that it was crucial for central banks to pass this first test in the new inflationary environment. Lowe said he hoped policymakers had done enough, but was concerned they hadn’t.

The next day, New Zealand warned it may have to raise rates again if inflation persists. This despite its rapid adjustment of 525 basis points and signs in recent months that it had probably reached the terminal rate.

Australia’s concerns eased somewhat last week when October inflation (the first reading of the fourth quarter) fell more than expected, from 5.6% to 4.9%. This was followed by a slowdown in house price growth in November and a bleaker outlook that may reduce the so-called wealth effect for households.

Deutsche Bank AG, which has long called for a December increase, said in a Nov. 29 research note that while it held that view, it now had “less conviction.” Deutsche noted that the slower monthly inflation was due to lower gasoline prices and government aid that curbed rent increases, meaning underlying pressures persisted.

“Our firm conviction remains that the RBA cash rate should be higher than it is now,” Deutsche’s Phil Odonaghoe said in the note. “If the RBA proves us wrong and pauses in December, we will simply change our increase call to February.”

Australia’s central bank does not meet in January and will introduce a new system next month.

Starting in February, the meeting will begin the day before the decision, the statement will be signed by the board and not just the governor, updated staff forecasts will be released simultaneously, and Bullock will hold a post-meeting press conference. RBA meetings will also be reduced from 2024 from 11 to eight per year.

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