RBA hikes 50bps, Aussie dollar falls

Australia’s central bank announced their latest rate move overnight. Heading into the meeting, expectations were centred around a 50bps hike and the central bank didn’t disappoint on that front. The Australian dollar initially traded higher and then lower against the USD.

Before this RBA meeting, a few speeches by key officials already framed the outlook. In this July speech, RBA Governor Lowe summed up the challenges ahead:

The policy challenge for the RBA is to return inflation to the 2–3 per cent target range while, at the same time, keeping the economy on an even keel. We don't need to return inflation to target immediately, as we have long had, for good reasons, a flexible medium-term inflation target.

But we do need to chart a credible path back to 2–3 per cent. We are seeking to do this in a way in which the economy continues to grow and unemployment remains low. It is certainly possible to do this, but the path ahead is a narrow one and it is clouded in uncertainty.

One of the biggest concerns is the impact of rising rates on borrowers, especially mortgages. Even though rate hikes are a tool for central bankers to tighten financial conditions and implicitly cause some stress to borrowers, they don’t look like they want to overdo it.

Lowe’s speech came hot on the heels of comments from Deputy Governor Bullock and her attempts to alleviate those concerns, pointing out that “most households have substantial equity in their housing assets, and lending standards in recent years have been more prudent. While in aggregate it seems unlikely that there will be substantial financial stability risks arising from the household sector, risks are a little elevated.”

At the meeting today, the Governor was keen to emphasise that they’re aware of these risks, saying that “an important source of uncertainty continues to be the behaviour of household spending. Higher inflation and higher interest rates are putting pressure on household budgets, with the full effects of higher interest rates yet to be felt in mortgage payments.”

On top of this, the removal of the word ‘normalisation’ from the statement may be significant. It may not seem like much but “a further step in the normalisation of monetary conditions” disappearing from the statement could suggest that the RBA now believes rates are at more normal levels.

If that’s the case, the central bank could downshift to smaller rate hikes of 25bps and focus on risk management while gradually moving interest rates into restrictive territory. Of course, the situation is still highly fluid. Trimmed mean inflation is still above target at 4.9%, and tight labour markets could offset the impact of rate hikes.

However, it seems that the central bank is planning for a less aggressive approach going forward unless the data shows a renewed acceleration of inflationary pressures. If the market perceives that the RBA is relatively dovish compared to peers, this could weigh on the AUD going forward.

On Thursday the 8th of September, Governor Lowe is scheduled to speak at the Anika Foundation. The talk is titled: Inflation and the Monetary Policy Framework, suggesting it could provide more clarity on the bank's thinking and potentially be an important event for markets and the AUD.