RBA rocks markets with a surprise 25bp rate hike

[MongiIG]

RBA raises rates again by 25bp, more hikes possible despite softer inflation.

 

Source: Bloomberg

 

Indices Inflation Australian Securities Exchange ASX Interest Monetary policy

 Tony Sycamore | Market Analyst, Australia | Publication date: Tuesday 02 May 2023

At its Board Meeting today, the Reserve Bank of Australia raised its official cash rate by 25bp to 3.85% ending its pause after just one month.

The RBA's eleventh rate rise in twelve months has rocked the local asset markets that were confidently pricing in no change to permit the RBA time to achieve its stated goal of allowing more time to assess the impact of its rate hiking cycle.

Last week's softer-than-expected Q1 2023 core inflation print proved of little comfort, as the RBA noted.

“Inflation in Australia has passed its peak, but at 7% is still too high and it will be some time yet before it is back in the target range,” the RBA governor, Philip Lowe, said in a recent statement. “Given the importance of returning inflation to target within a reasonable timeframe, the board judged that a further increase in interest rates was warranted today.”

While the RBA noted that goods inflation was slowing, it said that service inflation remained elevated with upside risks.

"Services price inflation is still very high and broadly based, and the experience overseas points to upside risks."

The RBA's aim remains to "keep the economy on an even keel as inflation returns to the 2–3 per cent target range, but the path to achieving a soft landing remains narrow."

The RBA retained its tightening bias and noted that more rate hikes were possible, bringing more misery to households already straining under the weight of higher mortgages and elevated inflation.

Governor Lowe stated, "Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve."

Attention now turns to the Federal Budget to be handed down next week Tuesday, May 9th. Labour force data for April is scheduled for release on May 18th. There will also be interest in the outcome of the Fair Work Commission Minimum wage determination in July.

The interest rate market is currently 50% priced for another 25bp rate hike by August, with the RBA's terminal rate priced at 3.98%.

What happened to the ASX 200?

The ASX 200 was caught off guard by the RBA's decision to raise rates, diving 80 points (1.1%) from 7328 to a low of 7248 in quick time before settling down 66 points (-0.91%) at 7268 at the time of writing.

All sectors are trading lower:

• Real Estate (-2.3%)
• Communications (-1.71%)
• Energy (-1.32%).

As noted previously, the ASX 200 typically sees a pullback in May/June of 3-5%, which targets a pullback towards 7150 at a minimum. The May pullback appears to have commenced this afternoon.

The AUD/USD has springboarded higher to be trading at .6707 for a gain of 1.15% on the day.

ASX 200 daily chart

 

Source: TradingView

1. TradingView: the figures stated are as of May 2, 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.