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Australia's central bank flags rate increases, 75 basis point moves unlikely

Australia's central bank flags rate increases, 75 basis point moves unlikely

June 22, 2022: -On Tuesday, Australia’s top central banker withered a lot more policy tightening ahead as rates were still “meager,” and higher inflation needed not to provide into public expectations and salary claims.

Meanwhile, Reserve Bank of Australia Governor Philip Lowe decreased the chance of rates being raised by a super-sized 75 basis points and took issue with market pricing of rates reaching 4% high by year-end.

Lowe is warning price pressures to persist in building globally and domestically, and inflation was now seen to reach 7% by the end of the year, up from a prior forecast of 6%.

That would be the highest rate in decades and far above the RBA’s long-term target band of 2%-3%.

“As we look back to 2% to 3% inflation, Australians have to be scheduled for interest rate increases,” Lowe warned. “The level of interest rates is low for an economy with low unemployment and experiencing high inflation,” he added.

The official cash rate is at 0.85%, lifting by 50 basis points earlier this month following an initial quarter-point increase in May.

Minutes of its June meeting on Tuesday showed the central bank’s board discussed raising the cash rate by 25 or 50 basis points and chose the latter because policy needed to be “normalized” to head off inflation.

After that, the U.S. Federal Reserve has hiked by 75 basis points fueling speculation the RBA might match it.

“At the moment, the decision we will take is either 25 or 50 again at the meeting,” Lowe said when questioned.

He noted that matching market wagers of 4% by year-end would require the sharpest tightening cycle in recent RBA history and would badly reach consumer spending.

“I think it would slow the economy a lot,” Lowe said. “I don’t think it is particularly likely.”

In July, investors respond by pricing out the chance of a hike of 75 basis points and trimming projections for the year-end, though rates are at 3.5%.

Lowe is focusing on the RBA would be watching how household spending reacted to increasing borrowing costs, given good wages were decreasing, and house prices stood easing from their highs.

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