Following yesterday’s RBA rate hike, Mutual Limited CIO Scott Rundell shares his post mortem:
The RBA surprised markets by hiking the official cash rate an additional +25 bps to 3.85% yesterday, and released a particularly hawkish statement. Markets and rates pundits alike were expecting another pause given the RBA’s prior comments around the need to assess the impact of hikes already in the can. The tone has flipped back to concerns that inflation remains too high, particularly services inflation, and labour markets too tight to leave rates unchanged for a second month. Personally, I see no reason for the flip, not yet.
The cash rate has now risen +375 bps in the past 12 months, the most aggressive tightening cycle on record. The RBA signalled at the last meeting that further tightening may be required to ensure inflation returns to target, yep ok, no arguments here. But so soon? Services inflation is their main bug-bear.
The previous meeting’s statement said “assessing when and 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….” My emphasis. This time, the statement highlighted that “services price inflation is still very high and broadly based and the experience overseas points to upside risks. Unit labour costs are also rising briskly, with productivity growth remaining subdued.”
Also read: Not Time for the US Fed to be Wishy-washy
Have any of these broader themes changed since the last meeting? Not materially no, which is arguably why today / yesterday’s hike came as such a surprise. That and the tone of the prior statement had given markets a sense of calm. Not that the hike cycle was necessarily done, consensus had at least one more hike in the pipeline, but that a period of assessment would provide a period of rate stability. Yesterday’s statement recognised uncertainties in the above areas, but the tone turned more toward putting its foot on the throat of inflationary expectations.
Outlook for inflation…data to date suggests inflation has likely peaked (at +6.9% YoY, trimmed mean CPI, as at December 2022) and is heading south. The point of debate here is whether the declining trajectory is fast enough to support no more rate hike arguments? I would have thought the RBA’s wording in the April statement around the need to assess the impact of hikes to date before moving further would have cemented another month’s pause. I was wrong, as was most of the market. The board’s tone has changed.
The last CPI print (trimmed mean) printed +6.6% YoY, still well up on target, but at least trending lower (from +6.9% YoY last), or +1.2% QoQ vs +1.7% QoQ last. The bank stated it was still too high and will take some time yet before it is back in the target range, mid-2025. They’ve been saying that for a while, so not sure what’s changed.
Labour markets…unemployment rate remains resilient at 3.5%, which in itself is causing the bank concerns. The latest wages data is not due for another couple of weeks (May 17th), for Q1’23, with the prior print coming in at +3.3% YoY, still modest, but above average nonetheless (+2.7%). Nothing here to suggest the need to hike just yet, so rates should have been held unchanged in my opinion. Having said that, the RBA would argue once the genie is out of the bottle, it’s very hard to get it back in. Agreed, but what’s changed since last month? Again, not much.
Market reaction…3Y ACGB yields popped +15 bps on the hike, closing the day +18 bps wider at 3.19%, and 10Y yields ended the day +9 bps wider at 3.45%. At the very front of the curve, the 90-day bank bill rate approached 4.00%, up +25 bps, closing at 3.92%. A slid income tailwind for floating rate note funds. The ASX 200 dropped -1.1% within 30 minutes or so of the announcement.
What next? “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve. The Board will continue to pay close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market. The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”
Focus points remain unchanged in this statement. What has changed is the further tightening of monetary policy ‘may’ be required, whereas last month the statement said ‘will’ be required. So, I’d say rate hikes are done. Last month the RBA wanted time to assess hikes to date, this month they’re concerned inflation is too high. I doubt they know whether they’re Arthur or Martha to be honest. I have no confidence this hawkish tone will persist beyond the next meeting given increasing inconsistencies in messaging.
