After five consecutive rate hikes, hitting the brakes? RBA Governor signals "wait-and-see" stance, Australian dollar falls in response

Title context: After five consecutive rate hikes, hitting the brakes? RBA Governor signals "wait-and-see" stance, Australian dollar falls in response Text: Reserve Bank of Australia Governor Michele Bullock signaled a wait-and-see approach to further tightening after policymakers split on a vote to raise the benchmark rate to an 18-year high to curb inflation. The Australian dollar fell as a result. Speaking at a press conference in Sydney on Tuesday, Bullock emphasized that this year's tightening has yet to flow through to the economy. Her remarks came after the nine-member monetary policy committee raised the cash rate by 25 basis points to 4.85%, the fifth hike this year, extending the most aggressive tightening cycle among advanced economies. She stressed that the impact of recent rate increases has not yet appeared, saying "the last two rate hikes haven't even begun to flow through." But she added that tighter policy is already restraining demand, which is starting to "slow relative to supply and will eventually rebalance." Traders and economists interpreted her comments as dovish. The Australian dollar fell against the US dollar as traders scaled back expectations for further rate increases. "The challenge for the RBA is that inflation remains sticky while growth momentum is starting to slow," said Catherine Palmer, head of fixed income strategy for Australia at BlackRock. "With the full effect of this year's tightening still flowing through the economy, we expect the RBA to stay on hold here, assessing new data and policy transmission while retaining the option for further tightening if inflationary pressures fail to ease." Australia's rate hike comes in a week when Sweden's central bank may also raise rates and the Bank of England is expected to lift borrowing costs for the first time in three years, with economies around the world battling an energy-driven inflation shock. Last month, market expectations for an RBA hike surged as officials turned more hawkish in public remarks and a red-hot CPI report landed. Consumer prices show little sign of returning to the central bank's 2% to 3% target range. RBA officials worry inflation expectations may be starting to drift, with Deputy Governor Andrew Hauser noting that a growing number of businesses see 3% to 3.5% inflation as the "new normal," a scenario he called "a central bank's nightmare." "The business liaison survey shows that many firms are facing cost pressures and have either already raised prices for goods and services as a result or are planning to do so," the RBA committee said. Beyond the impact of surging fuel prices, Australia has also become more prone to inflation because productivity is extremely weak. That has forced officials to lower the potential growth ratethe level of expansion the economy can sustain before generating inflationary pressure. Since late 2021, the RBA has consistently failed to reach the midpoint of its 2.5% inflation target range. Under its dual mandate, the central bank also seeks maximum sustainable employment. Bullock has signaled that the rise in unemployment this year is not yet enough to ease inflation pressure, highlighting the trade-off between the two goals. RBA raises rates again, with the cash rate at its highest level since 2008 The central bank also released updated quarterly economic forecasts in its Statement on Monetary Policy on Tuesday. The forecasts show underlying inflation will return to the RBA's 2% to 3% target range about six months later than assumed in August, with the economy expected to slow in 2027 and unemployment to rise. The RBA now considers financial conditions "restrictive" and said labor market conditions "remain slightly tight" despite rising unemployment. Beyond the gradual rise in unemployment, the RBA's aggressive tightening has also triggered a sharp cooling in the housing market, a key mechanism for monetary policy transmission. According to data from property consultancy Cotality, house prices in Australia's major cities plunged 1.4% in October, and the once-booming sector is heading for its biggest decline in 40 years. "The economy is slowing, house prices are falling sharply and unemployment is rising," the RBA committee said in its statement. "Higher interest rates and falling house prices and turnover are expected to weigh on growth in residential investment and household consumption." Shane Oliver of AMP Group believes the housing downturn will drag on economic growth through the so-called wealth effect, though the impact is not yet enough to divert the RBA's attention from high inflation. He expects the downturn to become a more important consideration only in the second half of next year.