Australia breaks with global trend, slows interest rate hikes

Australia’s central bank has lifted its benchmark interest rate by less than expected, defying expectations of more aggressive action to tame high inflation.

The Reserve Bank of Australia’s 0.25 percentage point hike on Tuesday was half of what markets had expected, suggesting officials are wary of hitting the brakes too hard and tipping the country into recession amid slowing global growth.

The RBA’s latest move took the cash rate – the rate commercial banks are charged for loans, which in turn affects the cost of mortgages and other borrowings – to 2.60 percent, its highest since 2013.

In a statement, RBA Governor Philip Lowe said rates had already risen “substantially in a short period of time” while the economy was facing growing uncertainty.

“One source of uncertainty is the outlook for the global economy, which has deteriorated recently,” Lowe said.

“Another is how household spending in Australia responds to the tighter financial conditions. Higher inflation and higher interest rates are putting pressure on household budgets, with the full effects of higher interest rates yet to be felt in mortgage payments.”

Still, Lowe said inflation in Australia remained “too high” and reiterated the central bank’s commitment to bring it back to the 2-3 percent range.

“Global factors explain much of this high inflation, but strong domestic demand relative to the ability of the economy to meet that demand is also playing a role,” he said.

Despite the smaller hike, the RBA said it expected inflation in Australia this year to reach 7.75 percent, before dropping to just over four percent in 2023 and about 3 percent in 2024.

The Australian dollar dropped from US$0.6510 to as low as $0.6451 following the announcement, while Sydney’s ASX 200 rose 3.8 percent.

Taking its cues from central banks worldwide, the RBA has raised interest rates six times this year, including four 0.5 percentage point hikes.

The central bank’s latest decision marks a divergence from the aggressive stance of counterparts such as the US Federal Reserve, which last month unveiled its third consecutive 0.75 percentage point hike.

“They’re less fearful of local inflationary pressures and oil prices, but are also worried about the global economic outlook,” Tim Harcourt, chief economist at the Institute for Public Policy and Governance at the University of Technology Sydney, told Al Jazeera.

“Hence they are taking the foot off the brake pedal slowly.”