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SYDNEY–The Reserve Bank of Australia slowed the pace of recent interest-rate increases at a policy meeting Tuesday, citing a deterioration in the global economic outlook and growing concern about tightening household budgets.
The RBA raised the official cash rate by 25 basis points to 2.60%, surprising most economists who expected a further 50-basis-point increase.
The increase is the sixth in succession since May. It follows 50-basis-point rises in June, July, August and September.
“One source of uncertainty is the outlook for the global economy, which has deteriorated recently,” RBA Gov. Philip Lowe said in a statement. “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,” Mr. Lowe said.
Consumer confidence has also fallen and housing prices are declining after the earlier large increases, he said.
But working in the other direction, “people are finding jobs, gaining more hours of work and receiving higher wages. Many households have also built up large financial buffers and the saving rate still remains higher than it was before the pandemic,” Mr. Lowe said.
The RBA has raised interest rates rapidly this year to counter a surge in consumer inflation, which is expected to peak at close to 8% before the end of 2022.
The RBA has been indicating for some time that it is prepared to slow the pace of interest-rate increases, pointing to growing confidence that inflation will cool rapidly in 2023 as commodity prices fall, while a recent surge in construction costs also dissipates.
The RBA has also made it clear that it doesn’t think the inflation outlook in Australia is as dire as that in the U.S. economy, given comparatively benign wage growth pressures locally.
Some economists had also warned the RBA that it risked overdoing policy tightening, increasing the risk of a recession next year.
With high household debt, and around one-third of mortgage borrowers highly exposed to the fastest pace of interest-rate increases since 1994, the RBA has indicated that it is watching conditions in the housing market very closely.
There is also a growing concern at the RBA that many mortgage borrowers will move from low fixed mortgage interest rates next year to much higher variable rates, creating a possible flash point for the housing sector.
More broadly, the Australian economy is in good shape, with unemployment at its lowest levels in close to half a century, and GDP growth solid, supported by robust consumer spending.
Write to James Glynn at james.glynn@wsj.com
