MNI: RBA Ready To Step Up Hikes, Hold Steady If Required -Lowe

Reserve Bank of Australia Governor Philip Lowe telegraphed the path for interest rates in 2023 will depend on how growth and inflation perform over the summer in a speech on Tuesday, following the seventh consecutive policy tightening since May earlier in the day.

He said the RBA's base case is that "interest rates will need to go higher still" following a 25bps hike to 2.85% on Tuesday, but underscored a flexible approach to policy making as the Bank seeks to stay on the "narrow path" of reining in inflation and underwriting growth. (See MNI RBA WATCH: Hikes 25bp, To Miss Inflation Target Until 2025)

"If we need to step up to larger increases again to secure the return of inflation to target, we will do that. Similarly, if the situation requires us to hold steady for a while, we will do that," Lowe said. The RBA stepped down to a 25bp hike at its October meeting after four consecutive 50bp increases.

"Given the uncertainties regarding the outlook, we will be watching very carefully how the economy and the inflation pressures evolve over the summer."

The widely-held view is that the RBA will raise rates by another 25bps at its final meeting of the year on Dec 6. Its next meeting after that is on Feb 7, for which a 25bp hike has only been 80% priced in by the market. Lowe reiterated concerns about the global environment noted in the post-meeting statement, highlighting the risk to the Bank's narrow path "not least because of developments elsewhere in the world."

The RBA raised its forecasts for inflation over the period to 2024, while trimming its growth estimates.

"Economic growth, though, is expected to slow next year because of the deterioration in the global economy and the squeeze on household finances," Lowe said.

"Our central forecast is that the unemployment rate holds steady for a while at what is a historically very low level, but then increases a bit as the economy slows. Inflation is expected to start declining early next year and then take a couple of years to return to the 2 to 3 per cent range." CPI is not expected to return to the RBA's target range until 2025.