MNI STATE OF PLAY: RBA Taps Brakes, Sees Slower Pace Of Hikes

The Reserve Bank of Australia has become the first major central bank to slow its pace of tightening by declaring its frontloading of monetary policy was over through a smaller-than-expected 25bps hike to 2.6%.

The sixth consecutive rate hike since its May meeting has delivered a cumulative 250bps of tightening and leaves the Cash Rate Target at its highest level since 2013, with the Bank justifying the slowing in its tempo to a business-as-usual 25bps increase by noting rates had "increased substantially" in a "short period of time." (See MNI BRIEF: RBA Surprise 25bp Hike, More Seen In "Period Ahead)

The move triggered a sharp reappraisal of the Bank's likely terminal rate, which is now forecast to peak at around 3.6% in May compared to 4.1% in the same month before Tuesday's decision.

The Bank provided itself with policy flexibility by saying it expected further rises in interest rates "over the period ahead" compared to a more prescriptive "over the months ahead" in its September statement. This affords the RBA time to assess the impact of its most aggressive tightening cycle since 1994, with Governor Philip Lowe noting the full effects of higher rates were "yet to be felt" in mortgage payments.

GLOBAL OUTLOOK WEAKENS

The October statement gave more prominence to the global economic outlook, which was noted to have "deteriorated recently". The RBA reiterated concerns about household spending amid elevated inflation and higher mortgage rates. Higher rates steered new housing loan commitments down 3.4% in August, the Australian Bureau of Statistics reported on Tuesday. The Bank will provide more insight into the impact of higher interest rates on households when it releases its Financial Stability Review on Friday.

It again noted the countervailing force of a tight jobs market, which has allowed people to receive more hours of work and higher wages in nominal terms. Tuesday's release of ANZ Job Ads data showed the job market remains tight despite a 0.5% m/m drop in September.

The RBA's previous statement that it was "not on a pre-set path" was abandoned. However, it said decision making would be "determined by the incoming data" and it is "closely monitoring" the global economy, household spending, and wage and price-setting behaviour. Keen to underscore that fighting inflation remains a key priority despite the smaller- than-expected hike , the statement added new language stating the Bank "remains resolute" in its determination to get inflation back to its 2-3% target.

The Australian dollar rallied following the decision, breaking through 0.6500 in early London trading.