As widely expected, the Reserve Bank lifted its key interest rate by 0.50% for a second time in a row at its monetary policy meeting on Tuesday, a decision that will be followed by home loan rate rises from the banks.
It was the third rate rise in a month – May saw a rise of 0.25% and then the back-to-back half a per cent hoists, putting the cash rate at 1.35%.
The news of the rise stopped the ASX in its tracks, reversing a post midday slide and pushing the ASX 200 up 18 points in a matter of minutes after the 2.30pm release of the decision and statement from Governor Philip Lowe.
The index added more ground and peaked around 6,657 points before at 6,629, up around 10 points from the low before the RBA announcement.
The Aussie dollar firmed a little around 68.78 US cents but was well off highs early in trading closer to 69 US cents and was down to 68.55 in early European dealings.
Investors ignored the warning in Governor Lowe’s statement of more rate rises to come.
“Today’s increase in interest rates is a further step in the withdrawal of the extraordinary monetary support that was put in place to help insure the Australian economy against the worst possible effects of the pandemic,” he said in the statement.
The RBA governor pointed to what he called “the resilience of the economy and the higher inflation” which means that the “extraordinary support from low interest rates and quantitative easing is no longer needed.”
Dr Lowe continued to insist that higher wages growth is just around the corner: “the Bank’s business liaison program and business surveys continue to point to a lift in wages growth from the low rates of recent years as firms compete for staff in the tight labour market.”
The Wage Price Index was stuck at 2.4% in the March quarter, the same low rate as before the pandemic started more than two years ago.
So there will be more rate rises, with Dr Lowe again promising (as he did in the June post-meeting statement and 0.50% rise) yesterday in his statement:
“The Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead.
“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.
“The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”
The hawkish tone to the post meeting statement seems to have satisfied market economists and others who want big rate rises to try and slow inflation.
That saw the AMP’s Chief Economist, Shane Oliver forecast a possible 0.50% rate rise in August.
“The RBA will probably hike again by 0.5% in August but thereafter we expect more gradual moves as economic data slows with the cash rate expected to rise to 2.1% by year end with a peak around 2.5% in the first half of next year, ahead of rate cuts in the second half of next year,” he said.
“ …the RBA just wants to slow things down to take pressure off inflation and give time for supply to catch up. It does not want to crash the economy and is not on autopilot. So, it will be watching indicators of spending and things like house prices very closely,” Dr Oliver added in his note on the RBA decision on Tuesday afternoon.
