There were no doubts what the market thought of the Reserve Bank’s (RBAs) decision to raise the interest rates by 50 basis points (bps) to 0.85 bps at 2.30 today with the S&P/ASX 200 tumbling from 7140 to 7086 points within 30 minutes, down -1.7% an hour out from the close.
The 50-basis point hike was the largest single increase since February 2000.
On the heels of the RBA announcement, the A$ rose nearly half a US cent to US72.33, while the yield on the three-year Australian bond nudged forward 19 basis points to 3.16%.
The RBA notes within today’s commentary that while [Australian] inflation is lower than in most other advanced economies, it is higher than earlier expected… with global factors, including covid-related disruptions to supply chains and the war in Ukraine, accounting for much of this increase.
The central bank also conceded that domestic factors, including capacity constraints in some sectors, a tight labour market and floods earlier this year added to upward pressure on prices.
While it’s probably self-evident to everybody, the RBA also reminded the market that inflation is expected to continue going up, before declining back towards the 2% to 3% range next year.
“Higher prices for electricity and gas and recent increases in petrol prices mean that, in the near term, inflation is likely to be higher than was expected a month ago", the RBA noted.
“As the global supply side problems are resolved and commodity prices stabilise, even if at a high level, inflation is expected to moderate. Today’s increase in interest rates will assist with the return of inflation to target over time.”
The RBA board’s decision to increase rates signals that the extraordinary monetary support needed to prop up Australian economy during the pandemic is no longer required.
“Given the current inflation pressures in the economy, and the still very low level of interest rates, the board decided to move by 50 basis points today” the RBA stated.
“The board expects to take further steps in the process of normalising monetary conditions… and is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”
However, the RBA also noted that the size and timing of future interest rate increases will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labour market.
While Goldman Sachs and Bank of America were among those to correctly forecast a 50-basis point increase, Westpac (ASX: WBC) and ANZ Bank (ASX: ANZ) along with a cohort of mainstream economists expected a 40-basis point outcome.
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