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Fed plans to continue hiking, but Australia ready to pause as it warns of recession risks

WorldAsiaFed plans to continue hiking, but Australia ready to pause as it warns of recession risks
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As Federal Reserve Chairman Jerome Powell Australia’s central bank could be headed down a different path, indicating a larger and possibly faster rate hike in the future.

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Governor of the Reserve Bank of Australia Philip Lowe said in a speech on Wednesday that the central bank is nearing the point where it is ready to put the brakes on rate hikes.

“With monetary policy now in restrictive territory, we are nearing the point where it would be appropriate to hold off on interest rate hikes to allow more time to assess the state of the economy,” he said.

Emphasizing the central bank’s goal of reducing cost-of-living increases, he said the central bank grapples with two risks when making monetary policy decisions: “One is the risk of not doing enough, which will result in sustained high inflation and Then scaling down later is proving very costly,” he said.

“The other risk is that we move too fast, or go too far, and the economy slows more than is needed to bring inflation down in time,” he added.

Lowe’s comments came after the central bank raised its benchmark overnight cash rate by 25 basis points to 3.6%, its highest since June 2012.

Australia shares edged up slightly after RBA’s smaller hike and less aggressive comment with benchmark indices S&P/ASX 200 closed 0.5% higher on Tuesday.

‘the plural is gone’

Contrasting the words with the central bank’s last meeting, Commonwealth Bank of Australia economist Gareth Aird said a pause could come as early as April.

“The plural is gone,” Aird said, pointing to the change from February’s description of “further raising interest rates” to March’s description of “further tightening.”

Here is a sentence of the RBA’s statement february,

  • the board expects Further hike in interest rates This would need to be ensured that the current period of high inflation is only temporary.

Here is a sentence of the RBA’s statement march,

  • the board expects further tightening of monetary policy This will be necessary to ensure that inflation returns to the target and that this period of high inflation is only temporary.

Aird wrote, further removing mention of plural rates, “means the board is not convinced it needs to raise the cash rate several times from here.”

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“Markets should treat the April board meeting as ‘live’ and the RBA may hold off,” he said in a note shortly after the central bank’s announcement.

“The context of assessing ‘when’ means that the RBA board has not yet made up its mind about raising the cash rate in April,” he said.

rhetorical deviation

australian dollar At the weakest level not seen since November 2022 following the central bank’s decision.

“Tuesday’s less aggressive communication from the RBA stands in stark contrast to Powell’s aggressive comments overnight,” the CBA wrote in a Wednesday note.

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us dollar index Asia continued to consolidate during the morning session following Powell’s testimony.

“The divergence of rhetoric meant that USD/AUD was sharply lower and the AUS-US spread on the 10-year bond yield widened to ~-29bps,” the CBA economists wrote.

IG market analyst Yep Jun Rong wrote that the currency pair was “suffering a double whammy from a ‘dowish hike’ by the Reserve Bank of Australia and a more hawkish Fed.”

The central bank’s latest statement “dues to expectations of an imminent rate pause at the next two meetings,” he wrote.

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