At its first meeting in 2023, the Reserve Bank Board raised the official cash rate by 25bp from 3.10% to 3.35%.

It was the RBA’s ninth consecutive rate rise for a total of 325bp in record time, as the RBA seeks to put a break on accelerating inflation and cool a red-hot labour market. The RBA’s official cash rate was last over 3.25% a decade ago, in September 2012.

Following the hotter-than-expected Q4 2022 inflation print released two weeks ago, the market was almost fully priced for today’s 25bp rate hike. However, in the accompanying statement, the RBA was more hawkish than the consensus expected and warned that further interest rate hikes were needed.

“The Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary.”

Explaining why the Board would continue to raise rates and heap more pain on households already experiencing “a painful squeeze on their budgets due to higher interest rates and the increase in the cost of living.” it noted,

“High inflation makes life difficult for people and damages the functioning of the economy. And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later.”

Yields in the Australian interest rate moved 10-12bp higher across the front end of the curve, reflecting the increased probability of a 25bp rate hike in March to 3.60%. It appears unlikely the RBA will end its rate hiking cycle until it sees evidence that inflation has peaked. (Q1 2023 inflation numbers are released at the end of April).

How did the ASX 200 react?

Following the RBA’s announcement, the ASX 200 fell 45 points from 7545 to below 7500 in quick time.

The interest rate-sensitive Real Estate sector fell 1.8%, joined by the Health Care, Consumer facing and IT sectors. The Energy sector is the only sector still in the green at the time of writing.

At a single stock level, furniture retailed Nick Scali fell another 4.5% on top of its 13% fall yesterday. BNPL stocks Sezzle and ZIP, which are never far from the action, fell 3.08% and 2.65%, respectively. Metcash fell 2.3%, Super Retail Group fell 1.61%, and Woolworths fell 1.55%.

As noted in recent reports, the ASX 200 was stretched to the upside and overbought after five straight weeks of gains. For the Elliott Wave followers, there is a five-wave advance from the October 6411 low to this week’s 7567.7 high. All of which warned that a pullback was looming.

From here, a break of support at 7460/50 coming from recent lows would indicate that a medium-term high is in place and that a corrective pullback is underway. We continue to favour trimming longs ahead of the bull market 7632 high and looking to either buy a sustained break of the 7632 high or a pullback into the 7200/7000 support area.

ASX 200 daily chart