Australia’s central bank says increases may slow at some point

Pedestrians walk through the main entrance to the main office of the Reserve Bank of Australia (RBA) in central Sydney, Australia, October 3, 2016. Photo taken October 3, 2016. REUTERS/David Gray/File Photo

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SYDNEY (Reuters) – Australia’s central bank plans to raise interest rates again as it struggles to contain hyperinflation, but sees reason to slow the pace of increases as interest rates approach normal levels.

The minutes of the RBA’s September board meeting on Tuesday confirmed that policy was not on a predetermined path and will be balanced to try to keep the economy afloat.

The minutes showed that “everything else being equal, members saw the argument for a slower pace of increase in interest rates becoming stronger as the level of the liquidity rate rose.”

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The central bank raised the cash rate by 50 basis points to 2.35% at the September 6 meeting, the fifth increase in several months with a total increase of 225 basis points.

Markets are betting on another half-point rise in October, in part to keep pace with the US Federal Reserve, which is widely expected to raise interest rates by 75 basis points this week.

Reserve Bank of Australia Governor Philip Lowe has signaled the possibility of a slowdown in rallies at some point, but also emphasized the importance of keeping inflation expectations steady in a tight labor market.

While wages have rebounded with the unemployment rate at a 48-year low, board members said, the pace of wage growth has remained consistent with the bank’s 2%-3% inflation target.

Members noted that the core wage growth rate has so far not reached levels that would conflict with achieving the inflation target on a sustainable basis.

The focus on inflation and the hawkish outlook from the Fed has led Westpac Chief Economist Bill Evans to revise his interest rate call, and he now sees a half-point move in October instead of 25 basis points.

It is also looking for quarter point gains in November, December and February as rates are pushed to a peak of 3.6%.

“Clear evidence of an expected slowdown in inflation won’t be evident until late February, allowing the RBA to comment in March with evidence that growth is slowing and that inflation and rates have also peaked in the US,” Evans said.

The minutes showed that board members discussed raising interest rates by 25 basis points, or 50 basis points in September or not, noting that rates are close to normal levels.

“They acknowledged that monetary policy is running with delays and that interest rates have risen very quickly and are close to normal settings.”

The minutes showed that board members also discussed the potential cost of higher interest rates for the central bank.

“The final cost will only be known once the last purchased bonds mature in 2033. Members noted that it is important to assess this potential cost in the context of the broader benefits to the economy that have flowed from the BPP (Bond Purchase Program) as part of the monetary policy package.”

The Reserve Bank of Australia will release a review of the bank’s bond-buying program on Wednesday.

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Reporting from Wayne Cole. Editing by Christopher Cushing; Sam Holmes and Anna Nicholas da Costa

Our Standards: Thomson Reuters Trust Principles.

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