Reserve Bank rate hike preview: Expect 50 bps, ASX 200 tends to fall on surprises

Mon 01 Aug 22, 12:42pm (AEST)
RBA - Reserve Bank of Australia name on black granite wall in Sydney Australia
Source: iStock

Key Points

  • The RBA is expected to hike interest rates by 50 bps to 1.85% on Tuesday
  • The ASX 200 sold off on larger-than-expected rate hikes in May and June
  • The market is beginning to expect potential rate cuts in the second-half of 2023

The Reserve Bank is expected to raise interest rates by another 50 bps to 1.85% on Tuesday.

June inflation figures remained elevated but slightly cooler-than-expected at 6.1% compared to consensus expectations of 6.2%. New dwellings and and automotive fuel were the most significant contributors, up 20.3% and 32.1% respectively.

Interest rates are currently projected to peak next February at 3.25%. So after this week, we'll be a little over the halfway mark of the tightening cycle.

The RBA expects inflation to peak in late 2022 and decline back towards the 2-3% range in 2023.

For now, RBA is expected to remain steadfastly hawkish. Though, easing supply-side bottlenecks, falling energy prices and slowing economic growth could blur its forward-looking guidance.

ASX 200 on rate hike days

The S&P/ASX 200 sold off quite sharply on the day of larger-than-expected rate hikes in May and June.

Sectors including real estate, utilities and financials underperformed on the day of the larger hikes.

  • 3 May -0.42%

    • 25 bps hike versus 15 bps expected

  • 7 June -1.53%

    • 50 bps hike versus 25 bps expected

  • 5 Jul +0.25%

    • 50 bps in-line with expectations

ASX 200 performance on rate hike days
ASX 200 performance on rate hike days (Source: TradingView)

Housing market feeling the heat

Australian dwelling values fell -1.3% in July, down for a third consecutive month according to CoreLogic.

National dwelling values surged 28.6% during the pandemic and now -2.0% below April's peak.

“There is a good chance the number of properties sold in the second half of this year and into 2023 will continue to trend lower as higher interest rates, a more cautious lending environment and a reduction in household confidence continues to weigh on housing demand," said CoreLogic's Research Director, Tim Lawless.

Australian dwelling values table as at 31 July 2022
Source: CoreLogic

On a more positive note, Lawless noted that some economic forecasters expect this rate hiking cycle to be short and sharp, with potential rate cuts to come through in the second half of 2023.

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Written By

Kerry Sun

Content Strategist

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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