This afternoon the RBA increased the official cash rate by a further +25 bps to 3.10%, which was in line with consensus. The statement was largely unchanged from the prior meeting and if anything is on the hawkish side of expectations. There is no suggestion a pause in rate hikes was on the table for this meeting, although markets were pricing a small possibility of such.
The board expects inflation to continue to grow, peaking around +8.0% YoY at the end of the December quarter, which for their mind is too high, and rightly so. Inflation is then expected to moderate to +3.0% YoY over 2024, unchanged from last month, but they added the phrase “priority to re-establish low inflation”. Tight labour markets are being closely monitored, and it’s safe to say the board is sweating bullets on the path of wages. “Given the importance of avoiding a prices-wages spiral, the Board will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms in the period ahead.” Interestingly, the minutes removed reference to unemployment forecasts, which were tabled in the prior meeting statement, at 4.0% by 2024 (up from 3.4% now).
Also read: Four Managed Funds That Include Interest Rate Risk
The statement was clear in that the board expects to raise rates further. As to whether they stick with the seven iron (+25 bp hikes), or revert back to the one-wood (+50 bps hikes), the focus in past minutes and this statement suggests the desire to maintain policy consistency outweighs other considerations…despite the RBA continuing to note the “size and timing of future interest rate increases will continue to be determined by the incoming data” in today’s release. With a wall of fixed rate mortgages to mature over the next 12 months or more, and the desire to keep the economy on an “even keel” I can’t see the RBA breaking out the one-wood again. Maturing fixed mortgages should do a lot of the work for them in suppressing household spending. The one doubt I have here, is will the timing of the fixed rate mortgages – being weighted toward the second half of 2023, be too late?
Markets reacted with an immediate 5 – 9 bps sell-off in the front of the curve in the first hour post the hike, while the back end (10Y) was largely unchanged, perhaps a basis point higher. Bank bills (90D) were +6 bps wider. The AUD was a touch firmer against the USD. The ASX 200 dipped -0.3% upon released of the hike, in an already down day.
Where to next? We now see a pause for two months, with no January meeting, so the next likely hike won’t be until February. Given the language of this statement, and all other considerations, we see another two +25 bps hikes as probable, taking the cash rate to 3.60%.
