Hike rates

Hawkish RBA hikes rates an oversized 50bps and piles pressure on ASX200

At its monthly meeting this afternoon, the Reserve Bank Board surprised the market and raised its official exchange rate by 50 basis points, from 0.35% to 0.85%.

Prior to today’s meeting, market pundits were split between a 25bps hike and a 40bps hike. The interest rate market was caught in the middle at 35 basis points.

The trigger for the 50bp hike is a more determined RBA attack on above-target and still accelerating inflation.

In the first quarter of 2022, headline inflation reached 5.1% and core inflation reached 3.7% – 70 basis points above the RBA’s 2-3% target. In its May statement, the RBA revised its inflation forecast to around 6% by the end of the year and core inflation to rise to 4.75%.

JToday, the RBA noted upside risks to its inflation forecast stemming from floods in New South Wales and Queensland and rising electricity and gas prices. He also said that it is not only global factors that play a role and that “Domestic factors also play a role now.”

The statement noted the continued tightness of the labor market. The unemployment rate at 3.9% is at its lowest level in 50 years and is expected to fall further. A factor that should stimulate wage growth and inflation.

“The Bank’s Business Outreach Program continues to report increased wage growth from the low rates of recent years, as businesses jostle for staff in a tight labor market.”

Today’s move by the RBA echoes recent moves by the Federal Reserve, RBNZ and Bank of Canada, all of which launched 50 basis point rate hikes, quickly becoming the new normal.

While the RBA’s forward guidance was not as clear as that of its central bank counterparts, the door is open for the RBA to take another 50 basis point rate hike next month as the RBA brings the cash rate back to the neutral rate of 2.50%.

“The Board expects to take further steps in the process of normalizing monetary conditions in Australia over the coming months. The magnitude and timing of future interest rate increases will be guided by incoming data and the Council’s assessment of the outlook for inflation and the labor market.”

What does this mean for the ASX200?

Ahead of today’s RBA meeting, the ASX200 was weighed down by rising yields and falling US equity futures after US 10-year yields soared to close at above 3% for the first time in almost a month.

The expectation of a more aggressive RBA trail cycle is seen as a negative for the ASX200 in the near term.

After rejecting resistance coming from last week’s 200-day moving average near 7300, today’s break of support at 7100 is seen as an indication that the ASX200 is on its way down its range. nine months 6950/6750.

Source Commercial view. The The figures declared are as of June 7 2022. Past performance is not a reliable indicator of coming performance. This report Is not contain and should not be considered to contain financial product advice or financial product recommendations

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