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Market Extra: What does a pivot look like? Here’s how Australia’s central bank framed a dovish surprise.


Central banks across the globe are fighting rampant inflation with aggressive interest-rate hikes, so much so that even rate increases can come across as dovish, depending on how they are framed.

That was the case Tuesday as the Reserve Bank of Australia increased rates by a quarter of a percentage point and promised more increases to come. But that surprised investors expecting a half-point increase. The Australian dollar

and government bond yields

tumbled in response.

It’s worth looking at the statement from RBA Governor Philip Lowe, to see how a central bank could make a dovish point while in fact increasing rates. He bluntly begins by noting that inflation is too high. The Australian economy is growing, the labor market is very tight, and wage growth is picking up. All very Jerome Powell–like so far. Price stability is “a prerequisite for a strong economy and a sustained period of full employment” and so on.

Now comes the pivot. “One source of uncertainty is the outlook for the global economy, which has deteriorated recently. Another is how household spending in Australia responds to the tighter financial conditions. Higher inflation and higher interest rates are putting pressure on household budgets, with the full effects of higher interest rates yet to be felt in mortgage payments. Consumer confidence has also fallen and housing prices are declining after the earlier large increases.”

Most of the above, it should be said, could accurately describe the U.S. economy, as well.

Lowe then weighed the opposing side of the argument, noting again that people are finding jobs and gaining more hours of work at higher wages, and also pointing out the large financial buffers built during the pandemic. The rest of the statement then repeats the need for higher interest rates and the bank’s determination to bring down inflation.

Jennifer Lee, senior economist at BMO Capital Markets, said it was “another faint sign that the bulk of the aggressive rate hikes is beginning to pass.”

Analysts at TD Securities said the bank had the first major central bank to pivot to smaller rate rises. “Quite clearly, today’s RBA decision will stoke speculation that other central banks will begin slowing the pace of hikes,” they said. The yield on the U.S. 2-year Treasury

fell 8 basis points to 4.04% on Tuesday, after a 10-basis-point decline on Monday.

The Reserve Bank of New Zealand will get its chance to follow suit, or not, on Wednesday.

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