RBA’s latest rate hike: Peak hawkishness?
In brief:
- On September 6, the Reserve Bank of Australia hiked its overnight cash rate by 50bps to a seven-year high of 2.35%. In the past five months, base rates has been increased by the fastest pace since 1984.
- The RBA acknowledged multiple challenges facing the global economy and Australia. Nevertheless, it believes that solid economic growth, elevated inflation and a tight labor market provide a firm foundation for rate hikes.
- For AUD cash investors, the rapid upward movement of interest rates, combined with expectations of further hikes and a steep yield curve represent positive news. Both cash and ultra-short duration strategies are likely to offer higher yields and more attractive reinvestment opportunities.
Following its monetary policy meeting on 6 September, the Reserve Bank of Australia (RBA) hiked its overnight cash rate (OCR) by 50bps to a seven-year high of 2.35% (Fig 1a). The widely anticipated rate hike is the fifth in the current cycle and the fourth outsized 50bps hike, increasing base rates by the fastest pace since 1984 as the central bank remains “committed to returning inflation to the 2-3% range over time”.
Still cloudy
In the accompanying meeting statement, the RBA acknowledged multiple challenges facing the global economy and Australia. Nevertheless, it believes that solid economic growth, record terms of trade and a tight labor market provide a firm foundation for rate hikes, and justified the latest rate hike based on inflation at “the highest it has been since the early 1990s and is expected to increase further over the months ahead”.
One key source of uncertainty remains the property market, with higher interest rates triggering a fall in house prices, transaction volumes and new building approvals – albeit back towards more normal, pre-pandemic levels. This has also impacted consumer confidence – although not yet consumer spending, which has been bolstered by higher wages and plentiful jobs.
Given the RBA’s previous indication that the neutral rate is at least 2.5%, the new OCR rate of 2.35% is still marginally loose. With three monetary policy meetings remaining in 2022, markets are anticipating a further 90bps of rate hikes by year-end which could leave the OCR rate at a more restrictive 3.25% (Fig 1b).
Outlook:
For AUD cash investors, the rapid upward movement of interest rates to levels last seen in 2015, combined with expectations of further hikes and a steep yield curve represent positive news. Both cash and ultra-short duration strategies are likely to present higher yields and more attractive reinvestment opportunities.
The RBA’s latest, outsized rate hike and its commitment to increase interest rates further over the months ahead struck a bearish tone. Although the bank did emphasized that rates were not on a pre-set path and, the size and timing of future increase will be guided by data, as well as RBA’s inflation and employment outlook. Meanwhile, tThe front-loading of rate hikes and belief that “inflation is expected to peak later this year and then decline back towards the 2–3% range” does suggest that the RBA may have reached peak hawkishness, and we believe future rate hikes will may be smaller as the central bank assesses the impact of previous movements.