Mutual Ltd CIO Scott Rundell provides the following commentary on Tuesday’s RBA rate hike.
Let’s set the scene
The last time the RBA met was back in early December, with no January meeting as per usual. ACGB Three Year yields were running around the park at 3.086% vs a rate just before the 2:30pm meeting today of 3.160% (+7 bps on the day). Further out the curve an ACGB Ten-Year yields were at 3.396% in December, and at 3.536% (+18 bps) earlier this morning, although were as high as 4.05% in between the two meetings. It’s been a wild ride.
At the time of the last RBA meeting, the terminal cash rate was around 3.50%, that is the expected peak in the RBA rate hiking cycle. On the eve of the RBA meeting today, the terminal rate was somewhere between 3.60% and 3.85%.
The ASX 200 is buoyant despite uncertainties, up +3.53% since the last meeting and at 7543 and within a bee’s wing-span of its all-time highs on the morning of the RBA meeting. The AUD was 0.67 in early December, peaked at around 0.71, and was back around 0.69 heading into the 2:30pm announcement.
The December meeting saw a +25 bps hike, to 3.10%, underpinned by persistently elevated inflation tight labour markets, the latter threatening further increases in wages growth. Markets were pricing in another +25 bp hike at the February meeting, today, taking the cash rate to 3.35%. And, that’s exactly what we received, along with a relatively hawkish statement. Upon first read, our sense is the likely terminal rate is closer to 3.85% than 3.60%. Immediately after the meeting, Three-Year Yields spiked to 3.27% (+17 bps on the day), while Ten-Year yields rose to 3.61% (+15 bps). The ASX 200 sold off -0.60% in the hour post the statement, going from small gains to losses.
The statement hinted at further rate hikes, keeping unchanged in the February statement that “the Board expects that further increases in interest rates,” but deleted previous wording that “it is not on a pre-set course.” Instead, the Board replaced that with language stating further rate hikes are “needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary.”
The statement also included updated views on how key macro variables will evolve, most of which er on the side of hawkish. Inflation is now expected return to “around 3.0%” by mid-2025, which compares to previous views that inflation would be a little above 3.0% over 2024. While they have lengthened the timing of when inflation might be back at the top end of their target range, they have nonetheless stated “this period of high inflation is only temporary.”
The RBA expect the unemployment rate to increase 3.75% by the end of 2023, versus current level of 3.50%, and then rising to 4.50% by mid-2025. The post financial crisis average has been 5.33%. GDP growth, which last printed at +5.9% YoY is expected to slow to +1.50% YoY over 2023 and 2024, below long run average growth rate of +2.50% YoY (post financial crisis).
Where to from here?
“In assessing how much further interest rates need to increase, the Board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market.” The board reiterated their priority of returning inflation to target, +2.0% – 3.0% YoY, “while keeping the economy on an even keel”…but, this task has a narrow margin for error. So, risk of policy error remains elevated, particularly given the lag between rate hikes and when the rubber (impact) hits the road (households).
