RBA's “Path of least regret” yields another 25 bp rate rise surprise

[MongiIG]

Ignoring market expectations for a hold, the RBA hikes rates for the twelfth time in thirteen months, intensifying the scrutiny on economic data and heightening concerns for the struggling ASX 200.

 

Source: Bloomberg

 

Indices Inflation Market Data Consumer price index Interest rate

 Tony Sycamore | Market Analyst, Australia | Publication date: Tuesday 06 June 2023 

At its board meeting today, the Reserve Bank of Australia raised its official cash rate by 25bp to 4.10%.

Once again, the RBA's twelfth rate rise in thirteen months caught the interest rate market on the wrong foot; the market had priced in an 80% chance of a 'hold' outcome.

Last month, after surprising the market with a rate rise by 25bp to 3.85%, the RBA noted that inflation remained too high. It issued a warning that further rate increases might occur, depending on economic and inflation trajectories.

RBA prioritises inflation management

Choosing to disregard softer data in May across the Wage Price Index, labour market data, retail sales and building approvals, the RBA refocused its attention on the upside surprises in the monthly CPI indicator and the wage increase at the Fair Work Commissions Review.

This move aligned with the Path of Least Regret, as anticipated here.

Today's decision was influenced by a repeated note on inflation from last month's statement, in which the RBA underscored the significance of keeping inflation expectations stable, stating, "Inflation in Australia has passed its peak, but at 7 per cent, it remains too high. It will be some time yet before it re-enters the target range."

The RBA maintained its tightening bias and noted that further rate hikes could occur, depending on incoming data.

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

Key data points to determine RBA's next move

The following incoming data will be closely scrutinised for clues around when and how much further the RBA might tighten.

• RBA Governor Lowe's speech: Wednesday, 7 June at 09:20 am AEST
• Q1 2023 GDP: Wednesday, 7 June at 11:30 am AEST (preview available)
• Labour force report for May: Wednesday, 15 June at 11:30 am AEST
• RBA Meeting Minutes: Tuesday, 20 June at 11:30 am AEST
• Monthly CPI indicator for May: Tuesday, 28 June at 11:30 am AEST
• Retail sales: Thursday, 29 June at 11:30 am AEST

The interest rate market is 80% (19bp), priced for another 25bp hike to 4.35% by the September RBA Board Meeting.

What happened to the ASX 200?

Today's RBA rate hike is another RBA hammer hit to the ASX 200, already trading 36 points lower at 7180 (-0.5%), before the meeting following a weak lead from offshore markets.

Post the announcement, the ASX 200 dropped another 55 points to a low of 7125, led by the Consumer-facing Discretionary (-2.1%) and Staples (-1.14%) Sectors. Also weighing on the index, a 1.3% fall in the heavyweight Financial Index, heavily exposed to struggling households facing cost-of-living pressures and rising interest rates.

A break of support at 7115 (the 200-day moving average) and last week's 7077 low would be problematic and lead to a test of year-to-date lows at 6900.

ASX 200 daily chart

 

Source: TradingView

1. TradingView: the figures stated are as of June 6, 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.