RBA slows its pace of rate increases, being concerned about households

According to a statement made by Deputy Governor at the Reserve Bank of Australia Michele Bullock, despite the unexpected choice made by the RBA this month to change rates by a lesser degree of 0.25%, the main trajectory of policy rate in Australia has been steeper than in most other major economies.

The pace of rate increases was slowed down as a result of the RBA meeting held two weeks ago in order to observe the effect of the policy tightening on households’ spending, which is a highly important indicator of the economy. It was also underlined that there are more moderate inflation levels in Australia, as well as a slower growth of wages.

As it was said by Bullock, the rate increases delivered at the recent meetings were less significant than the ones delivered by central banks of some other countries, but the Australia’s trajectory of rate increases has been similarly steep as theirs, or even steeper.

The central bank of Australia admitted the fact that its slowdown of monetary policy tightening set it apart from the rest of major central banks, according to minutes of its meeting on October 4. Central banks of many other countries insist on fast-paced increases that must be delivered to curb the inflation without any regard for associated economic costs.

The Reserve Bank of Australia, on the contrary, tells about its attempts to manage consumer prices, at the same time keeping stable economic situation.  

Nevertheless, further rate increase is still possible to happen, and its timing and volume would depend on data. As it was noted by Bullock, the RBA has a potential to act “much faster” than its counterparts from other countries if rates were increased at each meeting.

She also declared the board’s determination to perform all the necessary actions to move the inflation back to the target levels. The inflation target level is determined by the bank to be at 2%-3% over time, while its actual level was at 6% in the second quarter.

Experts on economy and financial markets projects two more rate increases by 0.25% to be delivered by the RBA at its meetings scheduled in November and December. The cash rate would be raised from the current level of 2.6% to 3.1% in that case.

The RBA has slowed down the pace of its monetary tightening due to being concerned about households’ spending that might be rapidly reduced because of rate hikes.

The results of rapid rate increases are still not obvious enough in any sphere aside from the housing market. The economy is still actively evolving, rates of unemployment are remaining low, and consumption is being stimulated by savings from the era of pandemic, all the while wages are growing.

However, most of the country’s borrowers have been on variable rates, which stimulates the potency of policy. Australian households are also considered to be among the most indebted in comparison with other countries, which makes them highly sensitive to rate increases.