Australia’s central bank says closer to normalising rates, hints at 2.5-3.5% range

Australia’s top central banker on Friday said interest rates are closer to normalisation after a successive run of outsized hikes, although he warned rates are still low, hinting a range of 2.5%-3.5% would be appropriate depending on economic cycles.

Appearing before a parliamentary economics committee, Reserve Bank of Australia (RBA) Governor Philip Lowe flagged more interest rate rises are required to bring inflation back to the bank’s 2%-3% target range, but said it would be appropriate to slow the rate of increase at some point.

“At some point, we will obviously not be increasing rates by 50 basis points at each meeting, and we’re getting closer to that point,” Lowe told a parliamentary economics committee.

Lowe said rates should at least average 2.5% over time and cycle between 2.5% to 3.5% depending on how the economy performs.

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

In just five months, the RBA has raised its key cash rate by 225 basis points to a seven-year high of 2.35% as it battles to contain a surge in inflation to the highest since 1990.

Markets are wagering on further hikes to a peak around 3.85%, though investors are less sure whether the central bank will go by another outsized 50 basis points in October or cut back to quarter-point moves.

Hawkish commentary from other major central banks argue for the RBA to stay aggressive, with the U.S. Federal Reserve widely expected to hike by at least 75 basis points next week.

Lowe said the next board meeting will be considering whether its a 25 bp increase or a 50 bp increase, reiterating the size and timing of future rate hikes will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labour market.

“In our view, the insertion of the caveat ‘at some point’ suggests a deceleration in the pace of tightening is not imminent,” said analysts at Goldman Sachs.

“We continue to expect the RBA to hike +50bp in October, before slowing the pace to +25bp in November and +25bp December. We will be paying close attention to upcoming data on retail trade and job vacancies later this month.”