RBA hands down November interest rate decision, scraps key policy tool

Supply side shocks have pushed inflation within the Reserve Bank’s target range for the first time in six years, forcing RBA governor Philip Lowe to abandon a key element of his pandemic response plan.

The Bank will no longer target the April 2024 government bond yield, a key benchmark rate which has played a central role in keeping longer-term interest rates down.  

“The decision to discontinue the yield target reflects the improvement in the economy and the earlier-than-expected progress towards the inflation target,” Lowe said.

“Given that other market interest rates have moved in response to the increased likelihood of higher inflation and lower unemployment, the effectiveness of the yield target in holding down the general structure of interest rates in Australia has diminished.”

Recent data showed core inflation rose 0.7 per cent in the September quarter, pushing underlying inflation to 2.1 per cent and generating another round of speculation that interest rates will rise sooner than expected.

While Lowe has long insisted that rates won’t rise until 2024 at the earliest, the inflationary spike seems to have finally prompted a rethink of that timing.

“The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. This will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently,” Lowe said.

“This is likely to take some time. The Board is prepared to be patient, with the central forecast being for underlying inflation to be no higher than 2½ per cent at the end of 2023 and for only a gradual increase in wages growth.”

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According to CBA economists, the RBA will most likely raise the cash rate by 0.15 per cent in November 2022 and 0.25 per cent in December 2022. They have also pencilled in a further three hikes over 2023 and 2024.

Pricing in the rates futures market is even more bullish, with traders betting on four increases in 2022 alone.

But the RBA has previously said that it’s not enough for inflation to sneak across the 2 per cent mark — it must be sustainably within the 2 to 3 per cent target band before Lowe and team start contemplating any policy changes.

There’s also the matter of an over-leveraged population, which could easily find itself struggling to make mortgage repayments if the RBA tightens monetary policy too quickly.

Currently, the average variable rate loan in our database sits at 3.21% p.a. On a $500,000 mortgage paid off over 25 years, an increase of 115 basis points would translate to an extra $314 in monthly repayments.

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