Mutual Limited CIO Scott Rundell has provided the following commentary and analysis in regard to the RBA’s decision today to lift the cash rate:
As expected the RBA hiked rates a further +50 bps this afternoon, taking the cash rate to 2.35%, up +225 bps in the past four months, the fastest tightening cycle in over 30 years. The hike itself is irrelevant, the vast majority of market pundits were on board with that level.
The main focus therefore was always going to be on the statement, and in that regard the broad tone was largely unchanged from prior meetings, offering nothing new as a point of difference.
Any changes in messaging was subtle, at least from initial readings, with a modest re-jigging of language to signal they’re not yet done for this cycle – nothing new from the last meeting – and they will raise rates further as required – ditto, nothing new.
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Committed to containing inflation
The statement reiterated the bank’s commitment to containing inflation. One subtle change in the September statement vs August statement is increased confidence or belief that rate hikes ‘will help bring inflation back to target and create a more sustainable balance of demand and supply in the economy. The prior statement indicated the rate hike then was a step toward normalising monetary policy setting domestically. So, they’ve move from normalising policy settings toward a more neutral setting. The RBA has signalled in the past the neutral rate is 2.50%, so close to where we are now. The next couple of meetings and likely hikes will push policy settings into ‘restrictive’ territory.
As is always the case, future hikes will be data-dependent. The RBA expect inflation to continue climbing, with a peak around 7.75% by the end of the year, and then begin moderating to ~4.00% through 2023 and then 3.00% – the top end of their target range – in 2024.
The bank also expecting employment will begin to soften as the economy slows. Specific focus going forward will be in labour costs and how firms deal with tight labour markets. Post this hike I expect the next few rate hikes to be smaller in size, probably +25 bps per shot.
Leading into the announcement bonds had rallied 5 – 6 bps, however these gains have been traded away with yields a basis point or two higher now (from the open, so a 6 – 7 bps sell-off). Bank bills have increased post the announcement, with BBSW1M up +7 bps and BBSW3M up +3 bps, which is positive for FRN’s. The ASX 200 dropped -0.4% post the rate hike announcement.
