The Reserve Bank has scared heavily-mortgaged households and pushed the Australian dollar to its highest level in two years by appearing to signal interest rate hikes.
In the minutes of its July 4 meeting, released on Tuesday, Australia’s central bank said it now estimates the “neutral” official cash rate to be 3.5 per cent – a full 200 basis points above where the cash rate is now.
That effectively means the RBA thinks it can substantially increase the cash rate, currently at a record-low 1.5 per cent, without curbing economic growth. Banks can be expected to eagerly pass on any rate rises to borrowers.
Many RBA watchers interpreted the inclusion of the estimate as a strong hint the central bank is now ‘hawkish’ (inclined to lift rates), as it is highly unusual for it to discuss the “neutral” rate at a policy meeting.
Economist Stephen Koukoulas described the language as “aggressive”.
“RBA has just effectively tightened monetary policy: the 3.5 per cent neutral rate reference will see AUD go to the moon and [interest rate] hikes priced in,” he wrote on Twitter.
The Australian dollar jumped up higher after the minutes were released at 11:30am on Tuesday – a sign that investors interpreted the statements to flag rate rises. The Aussie strengthened against the US dollar from around 78 US cents to over 79 US cents by late afternoon.
“Talking openly about a 3.5 per cent neutral rate will allow RBA to assist APRA in doing a job on the housing market.”
The official cash rate has been at a record-low 1.5 per cent since August last year, as the central bank tries to help the Australian economy recover from the aftereffects of the global financial crisis 10 years ago.
This record low rate, followed more or less by the commercial banks, has helped jobs – but also ballooned house prices and household debt, especially in Sydney and Melbourne.
Another line in the RBA minutes suggested it knew full well what it was doing by publishing such a market-sensitive number.
“The implications of statements by central banks in the major economies for the future path of monetary policy had been a focus for financial market participants more recently,” the RBA board said.
However, there were sceptics.
Sally Auld, economist at JP Morgan, said the bank’s discussion of the neutral rate was unlikely to be “interpreted as some sort of signal”.
“We don’t think this is the case – after all, the discussion is sympathetic with the RBA’s consistent description of policy settings over the past year as accommodative,” Ms Auld wrote in a research note.
The RBA did note there was “significant uncertainty” around estimates of the neutral rate.
Other complicating factors were that the minutes explicitly said that “holding the accommodative stance of monetary policy unchanged” would be “consistent with sustainable growth in the economy and achieving the inflation target over time”.
This is where the RBA usually heralds interest rate rises.
Another reason to doubt the RBA’s intentions was that it said “developments in the labour and housing markets continued to warrant careful monitoring”.
All eyes will be on the release of the latest labour market figures on Thursday.
The spike in the Australian dollar after the release of the minutes, and the steady appreciation against the US dollar in recent days, are likely to worry the central bank.
This is because the RBA said in the minutes that an “appreciating exchange rate would complicate” Australia’s economic growth.