Surprise 25bp Hike But Inflation Too High

The RBA unexpectedly raised rates 25bp to 2.6% rather than the 50bp widely expected by both the market and economists. It did repeat that it expects to raise rates further over the period ahead and it remains on a “narrow path” but it dropped the “not on a pre-set path” phrase.

• 25bp is now likely in November depending on both domestic and global data.
• The Board stated that given how much tightening had been done since May (“a short period of time”), it had decided to slow its pace and tighten by 25bp, which would also give it more time to assess how inflation and growth are likely to develop.
• The RBA reiterated its commitment to bring inflation back to its 2-3% target band and added a statement that Australian inflation “is too high”. It now expects inflation to increase further going forward rather than it peaking later in 2022, as mentioned in previous statements, suggesting less certainty around when inflation should begin to moderate.
• It added the global economy to household consumption in the paragraph on uncertainties.
• The RBA also noted that while wages growth in Australia is picking up, it is not as high as other OECD countries where inflation is also higher.
• The central bank continues to see inflation expectations anchored and there was no mention of a change in inflation psychology. It will continue to be guided by “incoming data”, which now includes the global economy as well as “wage and price-setting behaviour.”