RBA Surprised the Market With 25bps Hike

Reserve Bank of Australia (RBA) surprised markets by lifting interest rates by a smaller-than-expected 25bps, saying they had already risen substantially, although it added that further tightening would still be needed. The cash rate is now at 2.60% to a nine-year peak of 2.60%, the sixth hike in as many months which included four outsized moves of 50bps.

RBA had recently cited a possible slowdown in the pace of hikes at some point. But markets had wagered it would go by a 50bps point in part due to an aggressive US Fed rate hike last month.

The central bank pointed out a deteriorating outlook for the global economy as a major uncertainty, along with the response of Australian households to sharply higher borrowing costs.

We noticed house prices have dropped for five months in a row, led by big drops in Sydney and Melbourne. And also saw losses in pension funds from household wealth in the three months to June, and an even larger decline is likely in the September quarter.

But so far, consumer spending has held up well, thanks in part to a strong labour market where unemployment is near its lowest in five decades at 3.5%.

Following the RBA’s decision, investors took the local dollar down 0.7% to $0.6462, toward its recent 2-1/2 year trough of 0.6364. The AUDUSD closed at 0.650.

We believe the central banks has send an important signal about the pace of future hikes especially when they have lowered the pace of hike now, while most of the globe is still doing much larger hikes. We foresee RBA’s discussion will now focus between going to be zero or 25bps for the next few meetings.

Source: AmInvest Research - 5 Oct 2022