RBA Raises Rates By 50bp In Largest Rate Rise Since 2000

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RBA Raises Rates By 50bp In Largest Rate Rise Since 2000

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  • RBA hikes rates more than analysts expected | +50bps to .85%
  • Hawkish Inflation is expected to continue with additional 50bp hikes are projected
  • This is a significant shift in the RBA’s view of inflation and its monetary policy

The Reserve Bank of Australia announced a 50 basis point hike from .35% to .85% at 2:30 pm AEST this Tuesday, marking the first rate hike above .25% since 2000.

Although all analysts projected a rate hike, this increase of 50bps is more than what was previously expected and illustrates the RBA’s shift to a much more hawkish view of inflation as compared to a few months ago.

Although Australia is not feeling the effects of inflation as much as other advanced economies, this marks a substantial shift in Australian monetary policy and the RBA’s view on inflation. This increase comes as inflation remains high. Supply chains are still feeling the lingering effects of COVID, and the war in Ukraine continues to run rampant with no end in sight as Russia fired missiles at Ukraine’s capital of Kyiv for the first time in weeks on Sunday. Domestic factors such as capacity constraints in some sectors and a rigid labour market have also hurt Australia, with the floods earlier this year affecting some prices.

Unfortunately, working wages are also not keeping up with inflation as it continues to increase. Even so, wage pressure is building with unemployment at a 48 year low. The RBA also raised interest rates in exchange settlement balances by 50bps to 75bps.

Electricity and gas prices are expected to remain high in the short term as the oil industry remains volatile, and supply constraints both domestically and internationally continue.

Historically, although leading to an increase in short term prices, a near-term rise in energy inflation has not always led to an increase in long-term inflation, with analysts hoping the industry will recover with time.

Although today’s rate increase of 50bps will assist in returning inflation to the target band of 2-3%, inflation is expected to rise in the near term and potentially settle around 6.5% by the end of the year. Now, analysts expect several more 50bp rate hikes this year in July and August to take the cash rate above 1.756percent.

This 50bp rate hike is the first step in Australia’s return to normal. Australians will feel this rate hike in their wallets with this cash rate hike, meaning a $500k loan will be up to $133 and a $1M loan up to $265.

This significant shift in Australian monetary policy also shifts public focus to fiscal spending as the government reviews their balance sheet.

Louis Mosmann

Louis Mosmann is a Private Wealth Client and Research Assistant at KOSEC- Kodari Securities. Louis covers macroeconomic events, global markets and ASX300 company announcements, allowing clients to make more informed investment decisions. Email Louis at l.mosmann@kosec.com.au.

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