Australia’s central bank opens door to slower rate hikes

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SYDNEY, Sept 8 (Reuters) – Australia’s top central banker on Thursday opened the door to a slowdown in bank policy tightening after five rate hikes in as many months, triggering a rally in bonds as markets slashed bets on new aggressive measures.

In a policy outlook speech, Reserve Bank of Australia (RBA) Governor Philip Lowe said further rate hikes would be needed to contain inflation, but the RBA’s board was not on a predefined trajectory and was aware that rates had already risen sharply.

“We are aware that there are lags in the way monetary policy works and that interest rates have been rising very quickly,” Lowe said.

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“And we recognize that, all things being equal, the case for slowing the pace of interest rate increases becomes stronger as the level of the cash rate rises.”

Earlier this week, t

The RBA raised interest rates by half a point on Tuesday to a seven-year high of 2.35%, taking the rise since May to 225 basis points. Read more

Just the hint of a possible slowdown saw futures lengthen the odds of another 50 basis point rise in October, with rates now more likely to hit 3.0% by December, rather than 3.25%.

Three-year bond yields fell 10 basis points to 3.16% and the Australian dollar lost 0.5% to $0.6732.

MISTAKES HAVE BEEN MADE

Lowe pointed out that the Council had pledged to bring inflation back to its target range of 2% to 3%, after being surprised by the surge in consumer prices this year to a high of 6.1% in 21 year.

He said it was important that the current high inflation was not priced into expectations for price and wage setting, adding that so far measures of expectations were always consistent with a return to range of 2% to 3%.

Lowe acknowledged that the RBA had been hit hard by soaring inflation in recent months and said it was important for the bank to learn from these mistakes.

Australia’s Labor government in July launched an independent review of the RBA’s structure and policies, and how it has handled emergency stimulus measures during the pandemic.

The central bank has come under heavy criticism over its forecast errors, in particular Lowe’s prediction at the end of 2021 that rates were unlikely to rise until 2024.

Treasurer Jim Chalmers was forced on Thursday to reject calls for Lowe to be fired, saying he was not going to take “pot shots” at the independent central bank.

Asked about the criticism after his speech, Lowe said, “I have no intention of resigning. Look how much better the economy is now.”

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Reporting by Wayne Cole; Editing by Shri Navaratnam and William Mallard

Our standards: The Thomson Reuters Trust Principles.

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