Westpac: Some Lessons From Past RBA Tightening Cycles

Westpac note that “tightening cycles have been rare in Australia, with the RBA delivering its last hike more than a decade ago, in November 2010. While the backdrop of the pandemic and near zero cash rates makes the current cycle unique, there is still some value in comparing price action around previous cycles. In that way we can get an insight into market psychology ahead of the tightening.”

• “There has been a substantial degree of pre-emption in all cycles, with 2-Year rates not peaking until the first rate hike is delivered. After that, the paths are very different, and we would suggest significantly influenced by the RBA’s messaging around the pace and extent of its cycle once it is underway. The message from past cycles is that, unless the tightening cycle is an extended one, long end yields tend to reach a near term peak very early in the cycle. We can also see that the curve flattening of recent months is in line with the trends at this stage of the cycle. Hence our ongoing recommendation to fade steepening impulses. Indeed, while the flattening in the curve from its all-time steepness a year ago has been relentless, the curve is merely at its multi-decade average at current levels.”