On a Tuesday in early October 2022, Australia's central bank chose a smaller step than almost everyone had expected, raising its rate by a quarter point rather than a half. In a world where more than eighty central banks are lifting borrowing costs to tame inflation that has taken hold across economies, this modest move stands out as a possible hint of restraint. Markets, which have been waiting anxiously for the US Federal Reserve to ease its aggressive course, are reading it as a sign that the era of oversized hikes may be reaching its limit, though no one yet knows whether the turn is real.
RBA's Smaller 25bp Hike Stokes Hopes of a Fed Pivot as Global Central Banks Tighten
The path to achieving this balance is a narrow one
On a Tuesday in early October 2022, Australia's central bank chose a smaller step than almost everyone had expected, raising its rate by a quarter point rather than a half. In a world where more than eighty central banks are lifting borrowing costs to tame inflation that has taken hold across economies, this modest move stands out as a possible hint of restraint. Markets, which have been waiting anxiously for the US Federal Reserve to ease its aggressive course, are reading it as a sign that the era of oversized hikes may be reaching its limit, though no one yet knows whether the turn is real.
On Tuesday, the Reserve Bank of Australia raised its benchmark rate by 25 basis points, half the move most forecasters had expected. Of 28 economists surveyed by Bloomberg, only seven had predicted the smaller step, which made the RBA the first major central bank to step back from jumbo-sized hikes in the global fight against inflation.
The decision landed in a crowded field. More than 80 central banks are tightening at once, trying to keep high prices from settling into their economies and to steady their currencies. Against that backdrop, analysts saw the RBA's restraint as a possible preview of what the US Federal Reserve might do next.
The Fed has rattled markets with three straight 75-basis-point increases, and investors are now bracing for another 50-point move in November, even as the housing market slows and recession fears grow. The central bank is also shrinking its balance sheet, a process that pulls money out of the system.
Markets responded quickly. Australia's S&P/ASX 200 rose 3.8%, and US futures climbed in premarket trading. Deutsche Bank's Jim Reid said growing speculation that central banks might turn more dovish was the main driver. Governor Philip Lowe, for his part, described the path between cooling inflation and avoiding a sharp slowdown as narrow and clouded in uncertainty.
ING's strategists urged caution. The Fed will likely want stronger evidence that its hikes are truly slowing the economy before committing to a pivot. For now, the open question is whether Australia's smaller step is a one-off or the first of many.
On Tuesday, the Reserve Bank of Australia raised its benchmark interest rate by 25 basis points. Forecasters had expected twice that. Of 28 economists surveyed by Bloomberg ahead of the bank's October meeting, only seven had projected a quarter-point move. The decision made the RBA the first central bank to step back from jumbo-sized rate hikes in the current fight against inflation.
It is not alone in tightening. More than 80 central banks are raising rates at the moment, trying to keep high inflation from becoming embedded in their economies and to prop up their currencies. The RBA's smaller step stood out against that backdrop, and analysts read it as a possible signal for what the US Federal Reserve might do next.
The Fed has unsettled markets with 75 basis point hikes at three consecutive meetings. Investors are now bracing for a 50 basis point increase in November, even as a slowdown in the housing market raises fears of a US recession. The Fed is also pressing ahead with quantitative tightening, shrinking its balance sheet to reduce the money supply and bring down soaring prices.
ING strategists framed the moment carefully in a note. Recent hopes of a pivot, they wrote, have disappointed, and despite signs that a housing recession is already under way, it is unclear whether conditions have changed enough to prompt a shift in policy. Investors, they said, may be quietly hoping for a slower pace of hikes, or for quantitative tightening to be reconsidered, and the RBA's decision against a 50 basis point consensus may well have reinforced those hopes.
Markets responded quickly. In Sydney, the S&P/ASX 200 jumped 3.8% after the announcement, while the Australian dollar fell as much as 1% against the US dollar. In the US, stock futures rose in premarket trading: Dow futures were up 1.4%, S&P 500 futures up 1.6%, and Nasdaq futures up more than 2% at last check. A Fed move to smaller hikes, or even cuts, could feed a short-term stock rally, since borrowing costs would fall for companies and consumers.
Deutsche Bank strategist Jim Reid said several factors drove the rally, but the main one was growing speculation that central banks could soon turn more dovish, particularly after the market turmoil of the previous couple of weeks. The RBA's move overnight, he said, would encourage more of that thinking.
The RBA faces the same balancing act as the Fed: cooling inflation without causing an abrupt economic slowdown. Governor Philip Lowe said in a statement that the path to achieving this balance is a narrow one and is clouded in uncertainty.
ING's strategists cautioned that the Fed will likely want greater evidence that its hikes are slowing the economy before it commits to a pivot. For now, the open question is whether Australia's smaller step is a one-off or the first of many, and the Fed's November decision and its guidance on quantitative tightening are the next things to watch.
Citations marquantes
The path to achieving this balance is a narrow one and it is clouded in uncertainty.— Philip Lowe, RBA Governor
The RBA move overnight will encourage more of that thought.— Jim Reid, Deutsche Bank strategist
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