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Dow Jones Newswires: Australia’s central bank raises rates, says path to soft landing is narrow

SYDNEY — The Reserve Bank of Australia continued to raise interest rates cautiously at its final board meeting for the year, maintaining the pace of increases despite early signs that inflation may be peaking.

The RBA on Tuesday raised the official cash rate by 25 basis points to 3.10%. It was the third straight month that the RBA, which said it still expects to raise rates further, increased borrowing costs by that amount.

“Economic growth is expected to moderate over the year ahead as the global economy slows, the bounce-back in spending on services runs its course, and growth in household consumption slows due to tighter financial conditions,” RBA Gov. Philip Lowe said in a statement.

“Given the importance of avoiding a prices-wages spiral, the board will continue to pay close attention to both the evolution of labor costs and the price-setting behavior of firms in the period ahead.”

Some economists had said there was room for the RBA to pause after annual inflation moderated to 6.9% in October from 7.3% in September.

Yet most had forecast that the bank would raise rates by 25 basis points, observing that quarterly inflation data will carry more weight and that the absence of a January board meeting would give the board ample time to assess the cumulative impact of recent increases.

The RBA has now raised the cash rate by 300 basis points since May, but the impact of higher rates has been slow to flow through. That’s partly because fixed-rate mortgages had surged in popularity while interest rates were low, from about 20% of mortgages written at the start of 2020 to nearly 40% in early 2022.

Many of those fixed-term periods are due to expire in 2023, raising borrowing costs and reducing the amount of cash households can spend elsewhere.

“The board recognizes that monetary policy operates with a lag and that the full effect of the increase in interest rates is yet to be felt in mortgage payments,” Lowe said.

“Household spending is expected to slow over the period ahead although the timing and extent of this slowdown is uncertain,” he added.

Markets expect the cash rate to rise above 4.00% by the end of 2023 and for annual inflation to peak at well above 8.0% by the end of this year.

The RBA on Tuesday reiterated that it expects annual inflation to peak at about 8%. It expects inflation to moderate over 2023 and to sit a little above 3% over 2024, it said.

The RBA slowed the pace it was raising interest rates in October, becoming the first of the major central banks to pivot away from supersized increases. The Bank of Canada followed but policy appears to be diverging globally, with the Bank of England reaccelerating increases and the Reserve Bank of New Zealand saying it was now actively courting a recession to rein in consumption.

The RBA expects Australia’s economy to grow 1.5% in 2023 and 2024.

“The path to achieving the needed decline in inflation and achieving a soft landing for the economy remains a narrow one,” Lowe said.

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