The RBA hike official cash rates by 50bps
The RBA did the right thing today and raised rates by a more aggressive 0.50%. While we thought 0.40% was the right level, it was perhaps our OCD that played into this (would have left rates at 0.75%), however Governor Lowe did what only 10% of economists thought he would and took a more aggressive stance, sighting persistently high inflation, low unemployment and house prices that remain high. This was a big call and a few aspects stood out to MM:
– Inflation is expected to increase further, but then decline back towards the 2 per cent to 3 per cent range next year. This is a very optimistic view by the RBA, we think there are a barrage of risks around this stance.
– The board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead. They went onto say this will be data dependent but clearly they are poised for more moves.
– The market is now pricing in a 3.5% cash rate by mid-2023, which is a very aggressive stance. We are more of the view that rate hikes will be front loaded i.e. more aggressive now so to be less aggressive later.
– The sooner rates have transitioned back to more normal levels (remember, we’re still at just 0.85%), the better it will be for equity markets overall.
– Bond yield rose with the Aussie 3 year yield testing recent highs at 3.16%, while the 10 years were up 0.07% to 3.55%.
