RBA's Kent: rising neutral rate casts doubt on policy tightness

Kent's comments cut both ways, so the Australian dollar may not see a sustained move. His approval of the post-payrolls repricing implies the RBA is at ease with traders lowering near-term hike odds — a slight negative for the currency and a plus for short-dated bonds. The neutral-rate point, though, carries a hawkish undertone: a 4.60% cash rate could be achieving less than assumed. That puts the 28 October inflation report at centre stage; a strong number would swiftly revive pricing for a November hike, while a weak one would probably lock in a hold. Rate-sensitive areas, property and banks above all, will be watching that swing closely.

Earlier:

• Euro loses ground to the Australian dollar as three European headwinds shape early trading

Kent does not mind markets reducing the odds of a November hike in the wake of the soft jobs report, yet his alert that neutral rates are on the rise leaves the RBA ample scope to move again should inflation heat up.

Summary:

• RBA Assistant Governor (Financial Markets) Christopher Kent cited reasonable evidence that neutral rates are climbing both locally and overseas
• He is sure policy is somewhat restrictive but wondered whether it is restrictive enough
• Household demand is easing, business credit is still strong, and tax changes on housing have aided monetary policy
• Kent is guarded about monthly jobs numbers but acknowledged the labour market has loosened
• He called last week's post-jobs market reaction logical: the currency dipped, short-term rates fell and near-term hike odds shrank
• With four hikes this year, the cash rate stands at 4.60%; Q3 CPI lands on 28 October, before the RBA's 2 to 3 November meeting

Christopher Kent, Assistant Governor at the Reserve Bank of Australia, cited reasonable evidence that neutral interest rates are climbing in Australia and elsewhere, calling into question whether monetary policy is as tight as it appears after four increases this year.

At a fireside chat during Commonwealth Bank's Global Markets Conference in Sydney, Kent, who runs financial markets at the central bank, said he was confident policy is somewhat restrictive but asked whether it is restrictive enough.

The neutral rate marks the point at which interest neither stimulates nor restrains economic activity. If that level has climbed, a cash rate that looks tight on paper may be applying less restraint to demand and inflation than officials think, bolstering the case for rates to stay higher for longer or rise further.

Kent spoke as the RBA considers its next move. The board increased the cash rate by 25 basis points to 4.60% on 29 September, its fourth hike in 2026, with the bank pointing to inflation that remains too high, energy prices driven up by the expanding Middle East conflict, and lingering capacity pressures. It left the door open to more increases if necessary.

On the economy, Kent said household demand is cooling while business credit growth stays strong. He called the recent tax changes tied to housing useful for monetary policy, a sign the bank regards fiscal settings as aligned with its aims on housing demand rather than working against them.

He was more circumspect on jobs. Kent said he is wary of overinterpreting monthly employment figures, but accepted that conditions have become less tight. Last week's data showed employment down about 39,000 in September against expectations of a gain of roughly 20,000, and the unemployment rate at 4.7%, the highest in about five years.

That report pushed the Australian dollar and short-term interest rates lower as investors scaled back expectations for a near-term hike. Kent said the reaction made sense, a comment likely to be interpreted as the bank having no desire to resist the repricing.

Even so, the debate is far from over. ANZ stuck to its call for another 25 basis point increase in November after the jobs figures, saying its revised-up inflation outlook made a rate rise the more probable outcome.

Quarterly inflation figures due on 28 October will be the next important test before the RBA's 2 to 3 November meeting. If inflation beats forecasts, Kent's view that the neutral rate is moving up points to the bank still having room to tighten.