A Turning Point for Policy

The RBA surprised markets this week by slowing the pace of rates increase, opting for a 25bp move against expectations of a 50bp increase. Meanwhile, the RBNZ continued to show a heavy hand against domestic inflation pressures, having delivered a fifth consecutive 50bp rate hike.

In explaining their decision to raise the cash rate by only 25bp to 2.60% at their October policy meeting, the RBA referenced the considerable amount of financial tightening that has already been implemented, a total of 250bps to date. While the Board were cognizant of the domestic risks around inflation; consumer spending; housing and the labor market, a greater emphasis was placed on concerns around the deterioration in the global economy, likely in response to recent volatility within financial markets. As discussed by Chief Economist Bill Evans, we saw that developments in the global economy actually favored a larger increase at the October meeting, given the strength of US consumer inflation and it’s expected consequences of a more aggressive tightening cycle from the Federal Reserve, and hence further upward pressure on global interest rates.

Housing data released for Australia this week was mixed but consistent with our overall view of the economy. The correction in house prices was shown to have deepened and broadened across the country, with capital city prices falling by 1.4% in September, rounding out a 4.3% decline in Q3. Indeed, housing finance approvals also continued to mirror the broader correction to date, with further declines across investor and owner-occupier loans signaling a clear moderation in housing credit moving into year-end. In contrast, the often volatile dwelling approvals data surprised to the upside in September, more than reversing July’s 17.2% decline with a 28.1% rebound.

Across in New Zealand, the RBNZ’s laser-focus on domestic inflationary pressures was again evident at their October policy meeting, having delivered a fifth consecutive 50bp rate hike. Despite the lack of clarity around the expected peak in the Official Cash Rate, the Committee noted a debate between a 50bp or 75bp rate hike, a more hawkish shift which signals a higher peak for the cycle. Westpac continues to expect a peak a peak in the Official Cash Rate of 4.50%, involving two further 50bp rate increases in November and February.