RBA lifts rates to 2.35% amid a reminder ‘there’s no set path’ to reining in inflation

In line with market expectations, the Reserve Bank (RBA) today lifted the cash rate for a fifth consecutive month to 2.35% - the highest level since December 2014.

Echoing sentiment the market has become all too familiar with, RBA governor Philip Lowe belaboured the board’s remit to keep the economy “on an even keel” in an attempt to rein-in inflation - pegged to hit 7.8% years-end – back within the central bank’s 2% to 3% target range.

Unchartered waters

While markets expect the cash rate to hit 3.2% late in 2022, before peaking at 3.8% in July 2023, Lowe reminded Australia that due to global developments, there’s no pre-set path to achieving this balance.

While it’s as predictable as the incoming tide, Lowe also primed the market to expect further raise rates over the months ahead of inflation peaking later this year.

Interest rate losers

Bean-counters within the lending sector were quick highlight the domino effect of the rate hike on mortgagees.

In nice round numbers, to RateCity advises that a household with a $750,000 mortgage will see their monthly mortgage repayments increase by $216 relative to August, and by $922 relative to May.

Monthly repayments for households servicing a $1m are now $1229 higher than May.

Meantime, Wednesday’s national accounts data is expected to show the economy expanded by another 1% in the June quarter, lifting the annual rate of growth from 3.3% to 3.5%.

Given that a $1 earned today is worth more than $1 earned in a year’s time, rising interest rates also tend to be a net-negative for the future earnings of growth stocks.

Cleanaway (ASX: CWY) attributed weaker earnings margins to difficulty passing on higher diesel costs.

Interest rate winners

By comparison, some defensive stocks, notably those with the ability to pass on price increases, are somewhat incubated from rising interest rates.

Taking a sector-by-sector view, a heightened inflationary environment tends to favour real assets, notably infrastructure and resources with greater ability to pass on higher prices than other sectors.

While Adbri (ASX: ABC) struggled to recoup input cost increases, James Hardie (ASX: JHX) and Reece (ASX: REH) managed to pass on input costs.

Toll road operator Atlas Arteria (ASX: ALX) attributed higher dividends to interest on debt being fixed for five years, while income is largely rising along with inflation.

Then there’s QBE (ASX: QBE) which is also a beneficiary of rising inflation due to increased investment returns on its fixed interest portfolio.