RBA shocks market with 25 bps rate hike to 0.35%, signals "further lift" ahead

The Reserve Bank finally did it. They hiked interest rates for the first time since November 2011 and in an unexpectedly hawkish fashion.

The cash rate was increased by 25 bps to 0.35% after board members decided now was the “right time to begin withdrawing some of the extraordinary monetary support” put in place during the pandemic.

Consensus and forecasts were expecting a 15 bps hike, which is causing a massive reaction across equity and currency markets.

RBA governor Philip Lowe said that the move was appropriate given the recent pick up in wage growth and inflation.

"The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time. This will require a further lift in interest rates over the period ahead," said Lowe.

Why was 25 bps a surprise

Warren Buffet ripped into Wall Street over the weekend, saying the stock market had turned into a “gambling parlor”. So I might as well explain the 25 bps rate hike in gambling terms. 

Betfair, one of the world’s largest sports betting exchanges, had the following odds for today’s interest rate decision this morning: 

• $1,000: Rate cut 

• $4.50: No change 

• $7.40: 25 bps rate hike

• $1.32: Any other change

On a percentage term basis, this equates to roughly: 

• No change: 20%

• 25 bps: 12%

• Any other change: 70%

Go figure.

Market reaction

The ASX sold off sharply, giving back -0.5% just three minutes after the interest rate decision.

The hawkish pivot has investors worried about its implications for mortgage rates, economic growth and uncertainty about future interest rate decisions.

ASX 200 intraday chart

The Australian dollar spiked against the US dollar, but only briefly.

The Aussie went full circle from 70.8 cents to 71.4 cents (+0.77%) before fading back to pre-rate hike levels.

AUD/USD 1 minute chart (Source: TradingView)

Outlook

AMP Capital chief economist Shane Oliver is expecting another 25 bps rate hike in June and rates to be 1.5% by year end.

Interestingly, the ASX's implied yield curve suggests rates to be above 3.0% by this time next year.

Source: ASX