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RBA follows the path of least regret, douseing dovish hopes

The RBA's official cash rate sits at 3.10% while pushing the ASX 200 back below 7300.

Source: Bloomberg

Article prepared by Tony Sycamore

What happened?

At its final meeting of 2022, the Reserve Bank Board raise the official cash rate by 25bp to 3.10%.

It was the RBA’s eighth consecutive rate rise for a total of 300bp in record time, as it seeks to contain rising inflation and cool a red-hot labour market. The RBA’s official cash rate was last above 3% precisely a decade ago, in November 2012.

Following softer-than-expected inflation and retail sales numbers, there was speculation that the RBA might slow the pace of its rate-hiking cycle or deliver a 25bp rate hike along with dovish forward guidance.

However, the accompanying statement was little changed and noted that “inflation in Australia is too high” and that “The Board expects to increase interest rates further over the period ahead, but it is not on a pre-set course.”

The inclusion of the phrase no “pre-set course” allows the RBA some optionality to either slow or pause the pace of rate hikes early in 2023 in recognition that “The path to achieving the needed decline in inflation and achieving a soft landing for the economy remains a narrow one.”

How did the ASX 200 react

Before the RBA’s announcement, the ASX 200 was trading down about 10pts at 7315, 30 points above its intraday lows, on hope that the RBA would deliver investors an early dovish Christmas present.

The RBA’s decision to deliver a third consecutive 25bp rate hike and keep its hawkish forward guidance extinguished dovish flames for now and pushed the ASX 200 back below 7300.

Nonetheless, providing the ASX remains above support at 7200, coming from the October 6411 low, the uptrend remains in place, as do the seasonally bullish tailwinds.

ASX 200 daily chart

Source: IG

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This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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