ASX 200 rallies after RBA's unexpected 25 basis point rate hike

The Reserve Bank might be one of the first central banks to opt for less hawkish path, raising interest rates by an unexpected 25 basis points to 2.60%.

The more 'reserved' hike disappointed market expectations of another 50 bps.

Lowe's key quotes

Rates have risen quickly: "The cash rate has been increased substantially in a short period of time. Reflecting this, the Board decided to increase the cash rate by 25 basis points this month as it assesses the outlook for inflation and economic growth in Australia."

The lag between monetary policy and the real economy: "Higher inflation and higher interest rates are putting pressure on household budgets, with the full effects of higher interest rates yet to be felt in mortgage payments."

Inflation expectations: The Bank’s central forecast is for CPI inflation to be around 7.75% over 2022, a little above 4% over 2023 and around 3% over 2024.

What the RBA is watching: "It is closely monitoring the global economy, household spending and wage and price-setting behaviour."

ASX 200 rips higher

The ASX 200 was trading 2.4% higher at 2:29 pm following a strong overnight rebound on Wall Street.

The more dovish-than-expected rate hike caused investors to smash the buy button, rallying around 70 points or another 1.07% just minutes after the announcement.

At 3 pm AEST, the ASX 200 is trading 3.45% higher.

The buying has been broad-based across most stocks and sectors. All 11 ASX sectors are trading higher on Tuesday, led by Materials, Tech and Financials.

ASX 200 intraday chart (Source: TradingView)

The hike also caused the Australian Dollar to fall sharply against the US dollar, down 0.67% to 64.6 cents.

First mover or behind the curve

The RBA has become one of the first central banks to switch to a more dovish attitude towards interest rates amid a deteriorating economic outlook.

The bond market is currently expects interest rates to peak around 4.0% in May 2023, which seems increasingly unlikely after Tuesday's meeting.

The good thing about hiking less aggressively is that it lessens the risk of rushing to cut rates if things fall apart.

The Fed on the other hand continues to maintain a 'hike until the job is done' stance, opting to front-load rate hikes until inflation is well and truly 'defeated'. If inflation remains high and sticky, as it has been, then the RBA will once again be behind the curve.

That said, the RBA is in wait and see mode as it assess the impact of recent rate hikes, given the lags in data. If inflation remains high, then perhaps we'll see a more hawkish tack later this year.