Megan Neil, Senior Journalist

published 16 Sep 2022, 2

Reserve Bank of Australia governor Philip Lowe says the central bank may move to smaller interest rate rises as soon as next month.

After aggressively lifting interest rates, including an unprecedented four consecutive double hikes, Mr Lowe said the RBA board will consider going back to a “business as usual” 25 basis point rise at its October meeting.

“At our next meeting we will be considering whether it’s a 25 basis point increase or a 50 basis point increase,” Mr Lowe told a federal parliamentary hearing on Friday.

“At some point we’ll obviously not need to be increasing rates by 50 basis points at each meeting and we’re getting closer to that point.”

The RBA has lifted rates by 225 basis points since May in the fastest hiking cycle since 1994, taking the cash rate to 2.35% – its highest level since January 2015.

Mr Lowe said 2.35% is “still too low” and there will be further rate rises to bring down soaring inflation.

But he said interest rates are now closer to a normal setting.

“The fact that we’ve raised interest rates by quite a lot already increases the strength of the argument for smaller increases going forward,” he said during a twice-yearly appearance before the House of Representatives Standing Committee on Economics.

“We’re closer to a normal setting now which means that the case for large adjustments in interest rates is diminished.”

Mr Lowe said the board’s decision on 4 October will come down to its view of the balance of risks facing the economy, including what’s happening in the global economy, inflation and wages in Australia and how household spending is responding to higher rates.

Mr Lowe said further rate increases will be required to get inflation, which is expected to peak at around 7.75% later this year, back down to the RBA’s 2% to 3% target range.

While the RBA cut the cash rate to a record low 0.1% during the “dark days” of the pandemic, Mr Lowe indicated rates are unlikely to fall back to such low levels.

“We would only see rates come back down to close to zero if we had a sharp downturn again.”

He indicated a normal range for the cash rate is 2.5%, which is the mid-point of the RBA’s inflation target range, to 3.5%.

“I think we’ll cycle around some number between 2.5% and 3.5%, it’s hard to be specific, and we’ll cycle up and down that with the economic cycle.

“So we’re closer now to that, we’re at 2.35%, so we’re getting to that range that you’d think is normal but probably still on the low side.”

Some economists expect another mega rate hike

While the RBA board will be considering a smaller rate rise in October, National Australia Bank economists have now joined their ANZ counterparts in forecasting a fifth consecutive 50 basis point hike next month.

The NAB economists expect a step down to a 25 basis point rise in November that takes the cash rate to 3.1%, before the RBA pauses to assess the impact of its hikes and the evolution of inflation, the labour market and the economy.

Lifting their rate forecasts on Friday, the NAB team pointed to recent economic data and Mr Lowe’s comment that “the general inflation psychology appears to be shifting”.

“To us this is a significant shift and suggests an increased concern that more needs to be done to keep inflation expectations anchored,” they said.

Aerial view of houses, streets and parks in the Sydney suburb of Ermington

Some economists still expect another double interest rate hike in October. Getty

ANZ economists on Friday also warned that their current expectation that the RBA’s tightening cycle will end in just under 12 weeks with the cash rate peaking at 3.35% “is starting to look optimistic”.

“Against the backdrop of elevated global inflation and a tight labour market with accelerating wages growth, there is a clear risk the cycle could extend into 2023 and go higher than our current peak cash rate of 3.35%,” ANZ’s head of Australian economics David Plank said.

CBA economists, however, expect the RBA will slow the pace of tightening in October. They forecast 25 basis point hikes in both October and November that take the cash rate to a peak of 2.85%.  

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