By Stella Qiu
SYDNEY, Aug 13 (Reuters) – A senior Australian central banker on Thursday warned of the risk of further policy tightening, saying inflation threats remain on the upside and “a lot of things” would need to go right to avert another rate increase.
Speaking at a Reuters NEXT Newsmaker event in Sydney, Reserve Bank of Australia Assistant Governor Christopher Kent said the current cash rate of 4.35% is judged to be “somewhat” restrictive, but uncertainties remain.
“Our sense is that the various risks that we have called out, we think they’re leaning very much to the upside when it comes to inflation,” said Kent, adding that “a lot of things” will have to go right for rates to be on hold.
“One of the things that has to go right is the Strait of Hormuz has to open up in reasonable time. Another one that has to go right… is productivity growth picking up,” Kent said, adding that interest rates may need to rise further if those conditions fail to materialise.
The RBA on Tuesday left interest rates steady at 4.35% for a second meeting, having already hiked by 75 basis points since February in an effort to restrain stubborn inflationary pressures.
Governor Michele Bullock warned she personally thought interest rates might have to go up again, even though the bank’s latest forecasts had inflation – which ran at 3.9% last quarter – coming back to the 2%-3% target band next year.
Markets imply around a 54% chance of a further increase to 4.60% by December, though investors assume that will likely mark the end of the tightening cycle. A majority of economists polled by Reuters judged the cash rate has peaked.
Kent also gave an update on financial conditions, noting that the three rate hikes were working as intended to slow down demand. Given the falls in property prices, housing credit growth has started to slow, with a noticeable decline in new home lending, which will in time start to discourage spending, he added.
“All else equal, these changes will tend to reduce the extent to which monetary policy needs to constrain the growth in aggregate demand to help bring inflation back to the RBA target,” Kent said, although the boom in AI-related investment globally could work in the opposite direction.
Not all financial indicators were equally restrictive, he noted. Market pricing for the cash rate has eased in recent months, while credit remains readily available to banks, households and businesses.
(Reporting by Stella Qiu, Wayne Cole and Renju Jose in Sydney; Editing by Tom Hogue and Shri Navaratnam)
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