Mutual Limited CIO Scott Rundell shares his initial thoughts on the RBA’s decision to raise rates by 50bps:
The RBA has pulled out the one wood and gone WHAMMY, hiking rates by +50 bps to 0.85%, double the consensus move. Underpinning the hike was inflationary pressures – no surprises there, but the RBA accepted that price pressures are greater today that they were a month ago, with price headwinds from a tight labour market, floods, supply chain blockages and the situation in Ukraine all contributing.
Key outtakes:
- “Today’s increase in interest rates by the Board is a further step in the withdrawal of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic. The resilience of the economy and the higher inflation mean that this extraordinary support is no longer needed.’
- “Inflation is expected to increase further, but then decline back towards the 2–3 per cent range next year. Higher prices for electricity and gas and recent increases in petrol prices mean that, in the near term, inflation is likely to be higher than was expected a month ago. As the global supply-side problems are resolved and commodity prices stabilise, even if at a high level, inflation is expected to moderate. Today’s increase in interest rates will assist with the return of inflation to target over time.”
- “Given the current inflation pressures in the economy, and the still very low level of interest rates, the Board decided to move by 50 basis points today. The Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead. The size and timing of future interest rate increases will be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labour market.”
The front of the bond curve has been belted, which was always going to be the case when we get out an outlier hike. Three-year yields are +17 bps as I type, up to 3.15%, while the ten-year yields are +6 bps to 3.55%. Bank bills have spiked wider with 90D bills +21 bps to 1.44%. Great for our funds with sizeable chunks of holdings resetting their coupons this month. Expect a solid boost to running yield on the back of today’s announcement. Risk of more aggressive future rate hikes can’t be ignored given uncertainty around supply chain constraints. If these persist inflation could remain stubbornly high. The RBA appears confident that inflation will revert to target range by next year, but much depends on clearing supply chain blockages and some form of resolution around Ukraine.
While underlying rates remain accommodative in a historical context, the pace of the move and the knowledge that prices across staple goods are rocketing present challenges for households to digest, both psychologically and materially. A head of lettuce at $10.00 anyone? House prices will likely continue to moderate, but nothing too aggressive just yet. Sales volumes are moderating and we’re not seeing any panic selling and nor do we expect to. Key for housing is unemployment, which remains robust. As for the RBA’s credibility, central banks are always mindful of self-fulfilling prophecies, but even so, they missed the inflation signals early on in the peace and a +50 bps hike smells a touch of, not quite panic, but signs that they’re trying to catch up with the runaway inflation bus.
Next step, will banks pass the hike on, and how much?
