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RBA Wrongfoots Market With Outsized Hike, Sending Yields Soaring
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Australia’s central bank surprised investors by raising interest rates by twice as much as forecast and committing itself to “doing what is necessary” to rein in broadening inflationary pressures.
Bond yields soared and stocks fell as the Reserve Bank of Australia raised its cash rate by 50 basis points -- the biggest increase in 22 years -- to 0.85%, a result predicted by just three of 29 economists.
Central banks worldwide are grappling with worse-than-anticipated inflation driven by disruptions to the supply of goods and energy amid virus lockdowns in China and Russia’s war on Ukraine. Australia now joins more than 50 other monetary authorities -- including the Federal Reserve -- in raising rates by at least a half-point in one move this year.
“The tightening cycle has gotten underway with a bang, but clearly has further to run,” said Jo Masters, chief economist at Barrenjoey Markets Pty Ltd.
She is predicting another 100-basis-point of increases this year followed by one or two increases in 2023, citing the RBA’s comments today.
“The board expects to take further steps in the process of normalizing monetary conditions in Australia over the months ahead,” Governor Philip Lowe said in his post-meeting statement. “The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”
Australia’s largest lender, Commonwealth Bank of Australia, raised its forecast for July to a 50-basis point hike from a previous 25, while Australia & New Zealand Banking Group Ltd. sees a half-point inrease in August.
“There has been a clear shift in tone and stance from the board,” said Gareth Aird, head of Australian Economics at CBA, predicting a cash rate of 2.1% by year’s end -- “a level which we consider to be significantly contractionary.”
Today’s outsized hike sent Australian three-year yields up as much as 19 basis points to 3.16% and 10-year yields climbed up to 7 basis points higher to 3.55%. Australia’s benchmark share index extended declines to close down 1.5%.
The Australian dollar initially jumped on the announcement but quickly swung to a loss as bets for further gains were liquidated amid a broader shift in currency and equity markets away from risk-sensitive assets.
The rate rise was the first under new Prime Minister Anthony Albanese and will add to the economic challenges facing his Labor government after it won an election last month that ended nine years of center-right rule.
The tightening is also a test of consumer sentiment, which has been steadily sliding on concerns higher mortgage repayments will further weigh on heavily indebted households. They’re already grappling with rising living costs and tepid wages growth against a backdrop of weakening house prices.
Lowe highlighted those uncertainties, while saying that high savings built up during the pandemic would provide some insulation for consumption.
What Bloomberg Economics Says...
“The front-loading from the RBA reinforces our view that the hiking cycle is likely to be shallower than market pricing currently indicates, but we expect further tightening over coming months that takes the cash rate into neutral territory (1.5-2.0%) by 1Q 2023.”
James McIntyre, economist.
For the full note, click here
Money markets suggest the RBA will keep tightening through the remainder of the year for a cash rate of about 3.2% by December. Economists, by contrast, expect policy makers to move at a slower pace to a little over 2%.
Treasurer’s Troubles
Treasurer Jim Chalmers spoke to reporters after the decision and reiterated that households are facing significant financial stress.
“This will be very difficult news for all of those Australians who are already facing the skyrocketing cost of living,” he said. “Today’s decision in addition to the pressure it will put on family budgets, will also make it more expensive for the Commonwealth Government to service that trillion dollars of debt.”
Chalmers pledged that his budget in October will seek to relieve some of the pressure on Australians from the current economic circumstances. Yet he acknowledged that the new government confronts “an incredibly difficult combination” of challenges.
(Updates with comment from economist.)
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