Australia central banker says rate risks are skewed higher

A Reserve Bank of Australia (RBA) assistant governor on Thursday cautioned about the possibility of further rate hikes, stating that inflation threats remain on the higher side. Speaking at a Reuters event in Sydney, Assistant Governor Christopher Kent emphasized that the current cash rate of 4.35% is perceived as somewhat restrictive, but uncertainties persist.

Kent highlighted that various risks they have identified lean heavily towards the upside when it comes to inflation, and a lot would need to go right for interest rates to remain stable. One key condition is the Strait of Hormuz opening up reasonably soon, while another crucial factor is productivity growth picking up. Kent added that if these conditions fail to materialize, rates may still need to rise further.

The RBA maintained interest rates at 4.35% during their last meeting, having already increased by 75 basis points since February to combat persistent inflation. Governor Michele Bullock personally believed that rates might still need to increase, despite forecasts showing inflation settling within the 2%-3% target band next year.

Market projections indicate a 54% chance of another rise to 4.60% by December, although this is expected to be the final tightening move. Reuters' polled economists largely concluded that the cash rate has peaked. Kent provided an update on financial conditions, noting that the three rate hikes have been effective in reducing demand.

Slowing housing credit growth due to falling property prices will eventually curb spending, potentially easing the need for monetary policy to control aggregate demand growth, though global AI investment growth could counteract this effect. Not all financial indicators were equally stringent, with market pricing for the cash rate easing recently, and banks, households, and businesses still having access to credit.