By Stella Qiu
SYDNEY (Reuters) -A top Australian central banker said on Wednesday that there was increasing debate about whether the current cash rate of 3.6% is restrictive enough to keep inflation in check, adding that the question is critical for the policy outlook.
In an interview with Reuters in Sydney, Reserve Bank of Australia (RBA) Deputy Governor Andrew Hauser said the current judgment that monetary policy is mildly restrictive is central to the expectations that inflation would still slow in the economy.
“I think our best guess is that policy is still marginally restrictive, but that judgment is an increasingly important part of the policy challenge,” said Hauser.
“If it turns out that the judgment is we are no longer mildly restrictive, that has important implications for our future policy stance.”
The RBA held interest rates steady this month after three rate cuts this year, saying it was cautious about easing further given higher inflation, firmer consumer demand and a revival in the housing market. It noted for the first time that there were uncertainties regarding the assessment that monetary policy remains a little restrictive.
A shockingly high third-quarter inflation reading meant the central bank now sees inflation stuck above the 2-3% target band until mid-2026 and settling at 2.6%, above the 2.5% mid-point, based on the assumption of one more rate cut next year.
The cautious commentary has led markets to pare back the chance of a rate cut in May next year to just under 70%, with economists from the Commonwealth Bank of Australia and Citi calling for an end of the current easing cycle.
Data on Wednesday showed a large lift in new housing loans in the third quarter, driven by investor lending, adding to signs that financial conditions might not be that restrictive.
A surge in consumer sentiment on Tuesday has raised the risk of an upside surprise on household consumption, but Hauser cautioned that it seems a bit of an “erratic” reading and the central bank wants to spend time to see if it persisted before giving it too much weight.
The central case is still for a modest and gradual recovery in consumer spending, he added.
When asked if markets are in an artificial intelligence bubble, the deputy governor said he does not know and an imminent market crash is not his central case.
“We need to be alert to the fact that some of these financial measures are at historic extremes, and that might be telling us something about the outlook or it might be telling us we are genuinely in the middle of a new paradigm.”
(Reporting by Stella Qiu; Editing by Kim Coghill)
Comments