RBA Catches Market Off Guard With Scale Of Hike, Statement Reads Hawkish

The RBA catches the market unawares and lifts the cash rate by 25bp to 35bp. Note that most looked for a 15bp cash rate hike (19/29 surveyed by BBG), with the remainder of the economic community split between no change and a 40bp hike, so this is very much a curve ball.

• The notable mark higher in the RBA’s near-term inflation expectations and the fact that it only sees both underlying and headline inflation moving back to the upper limit of its 2-3% target band by around mid ’24 provides a very hawkish tinge.
• This meant that the Bank noted that “the Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time. This will require a further lift in interest rates over the period ahead. The Board will continue to closely monitor the incoming information and evolving balance of risks as it determines the timing and extent of future interest rate increases.”
• The Bank is of the view that inflationary pressure “largely reflects global factors. But domestic capacity constraints are increasingly playing a role and inflation pressures have broadened, with firms more prepared to pass through cost increases to consumer prices.”
• The Bank has also outlined positive developments on the wage front on the back of communique via its liaison scheme: “The Bank's business liaison suggests that wages growth has been picking up. In a tight labour market, an increasing number of firms are paying higher wages to attract and retain staff, especially in an environment where the cost of living is rising. While aggregate wages growth was subdued during 2021 and no higher than it was prior to the pandemic, the more timely evidence from liaison and business surveys is that larger wage increases are now occurring in many private-sector firms.”
• This combination of data in hand (CPI), a worrying inflation outlook and liaison findings (wages) allowed the Bank to act through a larger than expected hike today.
• The Bank also marked down its GDP growth profile on the back of the COVID situation in China, conflict in Ukraine and the inflationary outlook, with its unemployment forecast track also marginally lower.
• The statement, particularly the inflation projections, coupled with the Bank’s willingness to move by 25bp today, provides a very hawkish tilt to the decision.
• RBA Governor Lowe will give a press conference in just over an hour (16:00 Sydney/07:00 London).