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 […]
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Exclusive-Australia’s central bank debates if monetary policy is restrictive, deputy governor says
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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.
Three-year government bond futures came off earlier highs to be flat at 96.285, just a touch above a seven-month low of 96.26. Swaps pared back the amount of easing expected next year to just 17 basis points from about 20 bps before.
A growing number of economists, including the Commonwealth Bank of Australia and Citi, have called for an end of the current easing cycle.
Adding to signs that financial conditions might not be that restrictive, data on Wednesday showed a large lift in new housing loans in the third quarter, driven by a nearly 18% jump in investor lending.
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.”
He also noted that the Australian dollar has remained a natural hedge for pension funds investing overseas, while there have been substantial shifts in behaviours for the yen and euro.
“None of those worries have yet come to pass. The Aussie dollar remains as an effective natural hedge today as it did a year ago. It’s stunning, actually,” said Hauser.
(Reporting by Stella Qiu; Editing by Kim Coghill)