RBA's “Path of least regret” yields another 25 bp rate rise surprise
Ignoring market expectations for a hold, the RBA hikes rates for the twelfth time in thirteen months, intensifying the scrutiny on economic data and heightening concerns for the struggling ASX 200.
At its board meeting today, the Reserve Bank of Australia raised its official cash rate by 25bp to 4.10%.
Once again, the RBA's twelfth rate rise in thirteen months caught the interest rate market on the wrong foot; the market had priced in an 80% chance of a 'hold' outcome.
Last month, after surprising the market with a rate rise by 25bp to 3.85%, the RBA noted that inflation remained too high. It issued a warning that further rate increases might occur, depending on economic and inflation trajectories.
RBA prioritises inflation management
Choosing to disregard softer data in May across the Wage Price Index, labour market data, retail sales and building approvals, the RBA refocused its attention on the upside surprises in the monthly CPI indicator and the wage increase at the Fair Work Commissions Review.
This move aligned with the Path of Least Regret, as anticipated here.
Today's decision was influenced by a repeated note on inflation from last month's statement, in which the RBA underscored the significance of keeping inflation expectations stable, stating, "Inflation in Australia has passed its peak, but at 7 per cent, it remains too high. It will be some time yet before it re-enters the target range."
The RBA maintained its tightening bias and noted that further rate hikes could occur, depending on incoming data.
"Some further tightening of monetary policy may be required to ensure that inflation returns to the target within a reasonable timeframe, but that will depend upon how the economy and inflation evolve."
Key data points to determine RBA's next move
The following incoming data will be closely scrutinised for clues around when and how much further the RBA might tighten.
- RBA Governor Lowe's speech: Wednesday, 7 June at 09:20 am AEST
- Q1 2023 GDP: Wednesday, 7 June at 11:30 am AEST (preview available)
- Labour force report for May: Wednesday, 15 June at 11:30 am AEST
- RBA Meeting Minutes: Tuesday, 20 June at 11:30 am AEST
- Monthly CPI indicator for May: Tuesday, 28 June at 11:30 am AEST
- Retail sales: Thursday, 29 June at 11:30 am AEST
The interest rate market is 80% (19bp), priced for another 25bp hike to 4.35% by the September RBA Board Meeting.
What happened to the ASX 200?
Today's RBA rate hike is another RBA hammer hit to the ASX 200, already trading 36 points lower at 7180 (-0.5%), before the meeting following a weak lead from offshore markets.
Post the announcement, the ASX 200 dropped another 55 points to a low of 7125, led by the Consumer-facing Discretionary (-2.1%) and Staples (-1.14%) Sectors. Also weighing on the index, a 1.3% fall in the heavyweight Financial Index, heavily exposed to struggling households facing cost-of-living pressures and rising interest rates.
A break of support at 7115 (the 200-day moving average) and last week's 7077 low would be problematic and lead to a test of year-to-date lows at 6900.
ASX 200 daily chart
- TradingView: the figures stated are as of June 6, 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.
IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.
The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.
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. Please see important Research Disclaimer.
Please also note that the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.
Live prices on most popular markets