MNI: RBA's Lowe Says Closer To Pause, Rates Are Restrictive

Reserve Bank of Australia Governor Philip Lowe said the central bank is getting closer to a pause in its rate hiking campaign as he labelled the 11-year high in interest rates as "restrictive".

Further tightening of monetary policy was likely to bring inflation back to its 2-3% target, but Lowe said "with monetary policy now in restrictive territory, we are closer to the point where it will be appropriate to pause interest rate increases to allow more time to assess the state of the economy," in a speech on Wednesday. "At what point it will be appropriate to pause will be determined by the data and our assessment of the outlook," he added.

The RBA hiked the Cash Rate by 25bp to 3.6% on Tuesday, delivering the 10th consecutive increase and a cumulative 350bp of tightening since May. Overnight indexed swaps modestly marked down the odds of a hike in April, with a 25bp increase priced in for the May meeting. A peak rate of around 4% has been priced in, down from 4.15% ahead of the decision. (See MNI RBA WATCH: Hikes 25bp, Dovish Tweak Hints Pause Is Close)

Lowe's speech underscored the dovish tweak in Tuesday's statement, which toned down the hawkishness in February's guidance after recent economic data showed the rapid rise in rates had started to weigh on growth and inflation.

While January's Consumer Price Index slowed to 7.4% y/y from 8.4% y/y in December, the governor tempered his statement on the prospect of a pause by underscoring the fight against inflation remained the top priority. "We will do what is necessary to make sure that high inflation does not become ingrained," Lowe said.

NARROW PATH

He sounded a note of caution about the threat to the "narrow path" the RBA is treading in trying to rein in inflation and maintain growth and jobs. "It is still possible to achieve this, but we do need to be prepared for other outcomes as well, including a sharper rise in unemployment. Given the world we are living in, there are many sources of uncertainties at present and we could be knocked off that narrow path," Lowe said.

The RBA is paying close attention to trends in household spending, which has been moderating due to higher rates and inflation. Lowe noted that based on the interest rate increases that have already occurred, total required mortgage payments are expected to reach 9.5% per cent of household disposal income later this year, which will be around a record high.