SYDNEY, Oct 11 (Reuters) – Higher interest rates are working in Australia to cool demand and slow inflation, a top central banker said on Wednesday, while reiterating that more tightening might yet be needed to finish the job.
In a speech on the transmission of monetary policy, Reserve Bank of Australia (RBA) Assistant Governor Christopher Kent said the impact of past rate rises had taken time to be felt but were now beginning to bite.
“The effect of slower demand growth on inflation is now building,” said Kent, who heads the bank’s financial markets division.
“For example, we are hearing in liaison that a range of retailers are discounting prices in the face of weak consumer spending.”
The central bank has held rates at a decade-high of 4.1% for the past four months as it waits to see if an accumulated 400 basis-points of tightening will be enough to curb inflation.
Kent noted mortgage payments by households were already at record highs and set to rise further as old fixed-rate loans rolled over. Higher rates had also increased the incentive of households to save rather than spend.
“The lags of transmission mean that some further effects of rate increases to date are still to be felt through the economy, which will provide further impetus to lower inflation in the period ahead,” said Kent.
“Some further tightening of monetary policy may be required to ensure that inflation, which is still too high, returns to target in a reasonable timeframe.”
Investors have recently pared back pricing on another rate hike, in part due to fading expectations for tightening in the United States.
Markets imply only around a 15% chance of a rate rise at the RBA’s next policy meeting in November and a greater than 50% chance that rates have now peaked. (Reporting by Wayne Cole; Editing by Sonali Paul)
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