$A slumps on US Federal Reserve rate rethink

Reserve Bank of Australia governor Philip Lowe, in his second address to parliament this week, said on Friday that higher rates were necessary, and that failing to bring down inflation would create further pain for Australians. He said the jobless rate could rise as high as 9 per cent to crush price pressures should they become entrenched. This would cause a sharp slowdown in the economy, underscoring the need to return inflation to target.

Earlier this month, the RBA lifted the cash rate to 3.35 per cent, the ninth increase since last May, and warned of more ahead to rein in inflation, which accelerated to 7.8 per cent in the last three months of 2022.

Financial markets predict the RBA will raise the cash rate at least three more times to 4.1 per cent this year. This compares to a terminal rate of 4.2 per cent implied earlier this week.

Rate recast

ANZ on Thursday upgraded its cash rate, wage growth, and inflation forecasts. It now concurs that the cash rate will peak at 4.1 per cent, from a previous forecast of 3.85 per cent, with increases tipped in March, April, and May.

“Given that price pressures look to remain stronger for longer, we have lifted our 2023 forecasts and see the higher cash rate as necessary to return inflation to the top of the target band by late 2024,” said Felicity Emmett, a senior economist at ANZ.


“Persistent inflation pressures suggest that the cash rate will remain in restrictive territory for some time. We don’t expect the RBA to start easing until November 2024,” she said.

The currency has shaved off 1 per cent since Monday, following two consecutive weeks of losses. Investors are selling the local currency on expectations of higher US bond returns compared with Australian yields.