Australian central bank, no longer ‘patient’, opens door to tightening

© . FILE PHOTO: Two women walk next to the Reserve Bank of Australia headquarters in downtown Sydney, Australia, Feb. 6, 2018. REUTERS/Daniel Munoz By Wayne Cole SYDNEY () – Australia’s central bank opened the door to the first on Tuesday rate hike in more than a decade as it dropped an earlier pledge to be “patient” with the policy, a big surprise that sent the local dollar soaring to its nine-month high. At the end of its April policy meeting, the Reserve Bank of Australia (RBA) kept its cash interest rate at 0.1% but noted that inflation had risen and was likely to rise further, while unemployment had fallen faster than expected to 4. .0%. “In the coming months, the board of directors will have important additional evidence on both inflation and labor cost evolution,” RBA Governor Philip Lowe said in a statement. “The Council will review this and other incoming information as its policy,” he added, omitting any reference in previous statements to the Council that has been patient. Markets viewed the change as a step towards an eventual tightening and sent the local dollar up 0.9% to a nine-month high. Previously, Lowe had said a first hike was likely to come later this year, while markets have long bet on an earlier move given the rapid rise in inflation. Consumer price data is expected April 27, and analysts suspect core inflation could rise 1.0% or more in the first quarter to bring the annual pace to at least 3.2%. That would be the first time core inflation has surpassed the RBA’s 2-3% target since early 2010, and would make it more difficult to justify maintaining interest rates at an emergency low. “The retirement of the ‘patience’ mantra and is recognition that, like the rest of the developed country complex, inflation in Australia has and will surprise with its magnitude and momentum,” said GSFM investment strategist Stephen Miller. “The RBA wants to avoid meeting an inflation target by triggering a recession, or by prolonging high and potentially destabilizing inflation well into 2023.” Markets have long been priced for a rate hike to 0.25% in June, implying no fewer than six further hikes to 1.75% by the end of the year. Three-year bond yields rose 6 basis points to 2.46% on Tuesday, after already rising 87 basis points in March. That aggressive outlook partly reflects expectations that the US Federal Reserve will increase by 50 basis points in both May and June, adding pressure for other central banks to follow suit. Any RBA hike would come as a shock to local borrowers as they haven’t seen an official rise since 2010 and households are at record levels of mortgage debt.

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