MNI RBA WATCH: Hawkish Stance Strengthened With 25bp Hike

The Reserve Bank of Australia’s board acted on recent data points to raise the cash rate by 25bp to 4.1%, its highest level in 11 years, doubling down on May’s hawkish message to drag down inflation to its 2-3% target within a “reasonable timeframe.”

Again, the markets leading up to the decision questioned the Board’s resolve, with the overnight index swap rate lowering the chance of a hike to about 30% from 57% earlier in the week (See MNI RBA WATCH: Anticipation Builds for Another RBA Rate Rise), while two thirds of economists had predicted a pause, according to Bloomberg. Markets and economists have systematically downplayed the RBA’s desire to raise the cash rate since its April pause (See MNI POLICY: Investors Systematically Underestimating RBA), calling into question whether the Reserve’s decision to hold has perhaps injected greater uncertainty about its intentions.

The OIS market has now priced in a peak rate of 4.3% by October, with cuts to follow soon after – a 30bp increase over the same timeframe following May’s decision. Australian Commonwealth Government Bonds were sharply cheaper following today’s result.

LITTLE CHANGED

While the RBA’s move shocked markets, little about the Reserve’s communication changed from May, with “further tightening of monetary policy may be required” remaining.

The Board noted, however, that it had reacted to recent data points, signalling wages growth, services inflation and household consumption specifically. MNI reported last week the higher April CPI print at 6.8% from 6.3% in March and the Fair Work Commission’s better-then-anticipated 5.75% lift to award wages would add pressure on the RBA to lift rates.

“Accordingly, it will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms,” the Board said in its statement. “A significant source of uncertainty continues to be the outlook for household consumption. The combination of higher interest rates and cost-of-living pressures is leading to a substantial slowing in household spending. Housing prices are rising again and some households have substantial savings buffers, although others are experiencing a painful squeeze on their finances.”

The Board will next meet on July 4, however, the next quarterly CPI print will not publish until July 26, leaving open the possibility the RBA pauses until it can assess a fuller picture of inflation ahead of its Aug 1 meeting.

RBA Governor Philip Lowe will provide greater detail on the Board’s decision at the Morgan Stanley Australia Summit in Sydney on June 7.