RBA hikes 25bps

Fresh from the RBA:

At its meeting today, the Board decided to increase the cash rate target by 25 basis points to 35 basis points. It also increased the interest rate on Exchange Settlement balances from zero per cent to 25 basis points.

The Board judged that now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic. The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected. There is also evidence that wages growth is picking up. Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions.

The resilience of the Australian economy is particularly evident in the labour market, with the unemployment rate declining over recent months to 4 per cent and labour force participation increasing to a record high. Both job vacancies and job ads are also at high levels. The central forecast is for the unemployment rate to decline to around 3½ per cent by early 2023 and remain around this level thereafter. This would be the lowest rate of unemployment in almost 50 years.

The outlook for economic growth in Australia also remains positive, although there are ongoing uncertainties about the global economy arising from: the ongoing disruptions from COVID-19, especially in China; the war in Ukraine; and declining consumer purchasing power from higher inflation. The central forecast is for Australian GDP to grow by 4¼ per cent over 2022 and 2 per cent over 2023. Household and business balance sheets are generally in good shape, an upswing in business investment is underway and there is a large pipeline of construction work to be completed. Macroeconomic policy settings remain supportive of growth and national income is being boosted by higher commodity prices.

Inflation has picked up significantly and by more than expected, although it remains lower than in most other advanced economies. Over the year to the March quarter, headline inflation was 5.1 per cent and in underlying terms inflation was 3.7 per cent. This rise in inflation largely reflects global factors. But domestic capacity constraints are increasingly playing a role and inflation pressures have broadened, with firms more prepared to pass through cost increases to consumer prices. A further rise in inflation is expected in the near term, but as supply-side disruptions are resolved, inflation is expected to decline back towards the target range of 2 to 3 per cent. The central forecast for 2022 is for headline inflation of around 6 per cent and underlying inflation of around 4¾ per cent; by mid 2024, headline and underlying inflation are forecast to have moderated to around 3 per cent. These forecasts are based on an assumption of further increases in interest rates.

The Bank’s business liaison suggests that wages growth has been picking up. In a tight labour market, an increasing number of firms are paying higher wages to attract and retain staff, especially in an environment where the cost of living is rising. While aggregate wages growth was subdued during 2021 and no higher than it was prior to the pandemic, the more timely evidence from liaison and business surveys is that larger wage increases are now occurring in many private-sector firms.

Given both the progress towards full employment and the evidence on prices and wages, some withdrawal of the extraordinary monetary support provided through the pandemic is appropriate. Consistent with this, the Board does not plan to reinvest the proceeds of maturing government bonds and expects the Bank’s balance sheet to decline significantly over the next couple of years as the Term Funding Facility comes to an end. The Board is not currently planning to sell the government bonds that the Bank purchased during the pandemic.

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. The Board will continue to closely monitor the incoming information and evolving balance of risks as it determines the timing and extent of future interest rate increases.

Not overly hawkish given “some withdrawal of the extraordinary monetary support provided through the pandemic is appropriate”. QT is a natural rundown of holdings, not active selling.

Markets are still too aggressively priced for what’s ahead given the fixed-rate reset, falling house prices and tumbling consumer confidence.

Houses and Holes
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Comments

    • reusachtigeMEMBER

      Hahaha, broken clock and all. Solar boy said this would happen 18months ago. He left because he had to due to his agreed response to his embarrassment. Oh, I predict the sun will blow up. When will I be right? LOLOLOL

      • Goldstandard1MEMBER

        I believe March this year was the call. Things are so dire that the RBA just lifted rates a full hike before an election. I think that is proof enough March was spot on (and 12 months/10 years later than it should have been). It’s brown trousers time for sure and next month will probably be a 0.4 rise as well. That’s the one ppl will be shocked by.

        • reusachtigeMEMBER

          I think you mean March 2020 don’t you? Then March 2021? He hasn’t been around for ages so there was no March 2022. Youse who worship solar boy should be extremely embarrassed with yourselves and will need to struggle with your shame.

          • + 100 I’ve been calling this out to the fan club every time, noting that being right in the end is irrelevant if your short positions blew up your forum hedge fund multiple times over before hand.

          • Mike Herman Trout

            I’d rather be twelve months early on a catastrophe…. just sayin….

          • Goldstandard1MEMBER

            Yeah anyone who pays attention knows. I don’t bother responding to the cartoon character anymore. I think he’s a bot.

    • Ronin8317MEMBER

      To misquote Obi-Wan: “I felt a great disturbance in the Force, as if millions of mortgage debt slaves suddenly cried out in terror and were suddenly silenced.”

    • Meh it will be temporary puke. My stonks are down about $25k odd since the start of the year, but i’m invested in blue chip companies. Not worried. People always panic. But where else are they gonna park their money? Term deposits?

  1. BabundaMEMBER

    There is also evidence that wages growth is picking up

    Oh? Pray tell.

    The Bank’s business liaison suggests that wages growth has been picking up

    Riiiight.

    • happy valleyMEMBER

      “There is also evidence that wages growth is picking up”

      Backbone Phil talking about his own humungous remuneration package?

    • happy valleyMEMBER

      “The Bank’s business liaison suggests that wages growth has been picking up”

      Business liaison = the RBA office junior from a ‘market survey” done with the local cafe and grog shop owners when the junior went to get the Board members’ cafe lattes and Cristal champagne.

      • I hated doing “business liaison” back in the day. Fly economy to some God awful place, hire a Toyota corolla and drive around town meeting businesspeople who would take delight in barrating you for whatever gripe they had with the government, then talking bullxxxt about their business and how amazingly it was going. Trying to sift through the cascade of lies when you get back, to put together a coherent story…

      • Agree. Though ScoMo is also claiming we don’t have as high inflation as they do in NZ, US cause he’s da bestest economic manager and has put a shield in place. I’m not sure why NZ is so different to us, is it the way they measure it, I seem to recall countries inflation differs due to different ways of measuring it, not to mention ScoMo’s reduction in fuel tax.

  2. One trick ponyMEMBER

    Continue to agree with MB that interest rate market expectations for ozzie cash rate are unrealistic – not necessarily the pace and timing of the initial hikes but the level they get to.

    But will only be a matter of months before either the interest rate market has to seriously adjust, or plenty of people that don’t believe the market have to seriously adjust their thinking (including myself).

    • The interest rate market started adjusting around mid-March (look at BBSW history for 3m and 6m). The banks resisted passing it on because as ANZ proved around a decade ago when they tried tying mortgage rates to the true cost of debt rather than the cash rate, the general public has absolutely no understanding of how interest rate markets work. It’s what happens when your intellectual capacity is based on MAFS not maths. Stand by for a decent increase, as both BBSW and overseas borrowing rates are up bigly.

      • One trick ponyMEMBER

        Good point – I was just talking about the cash rate (not bank funding costs) and a view that it won’t get as anywhere near as high as the market is pricing. But if the increase in bank funding costs is materially higher than the increase in the cash rate (I agree this is likely) – I would say that only supports the argument that the cash rate won’t get very high.

      • RomulusMEMBER

        The floating rate is linked to the RBA.
        While the fixed rates which have already been going up significantly are linked to the overseas funding markets.
        So not expecting the banks to raise rates anymore than the RBA.

    • The RBA has specifically acknowledged this as well, end mortgage rates to consumers and business need to be considered in the context of the broader cash rate, out of cycle hikes by lenders will most likely reduce the need for official RBA hikes.

      1.5-2.0% appears to be a sensible neutral rate, especially when a chunk of your inflation either can’t be controlled or will at the very least have a significant lag to cash rate movements.

      My view, we need to consider that rate movements in at least 2 stages, 1 being the removal of emergency rates and then a move into deliberate tightening. Lets’ see what consecutive rate rises into Christmas do to the demand side of the equation ditto for observing the outcomes of the aggressive movements of the FED.(stage 1). Maybe by then we will have a legitimate read on where monetary policy needs to settle. Markets have aggressively repriced rates since the lows, they clearly under-priced the inflation threat during the aggressive compression so what’s the chances the market has correctly priced rates during an aggressive selloff?

    • I wonder if the wage price index is again some gaslighting b.s. which will e massaged to say higher wages are here, but indidually the mortgage holders won’t actually see it

  3. Mike Herman Trout

    Hang on a second…. these guys promised they wouldn’t raise rates until at least 2024. I can’t believe I put so much trust in a bunch of unelected bureaucrats… what was I thinking

  4. The RBA were so close to a June hike. Things must be bad if they do this in an election. I suppose the wage report isn’t that important after all..

  5. Amazing. Back in the day a .25 rise was not even a thing, .25 would have been a yawn. Now it’s major news. Shows how fragile this is becoming.

      • .1% (one TENTH of one percent) belongs in the realms of panic economics, not a proper healthy economy. To use this as a basis for comparison is clutching at straws.

  6. I can’t believe this is the first rate rise since 2010, that’s incredible, it’s just been one massive booze up fest of debt thanks to the RBA. No wonder so much is broken in our economy.

  7. TRADINGtheAPOCALYPSE

    Lowe:

    “It’s not unreasonable to expect that… interest rates could rise to 2.5%,” Lowe says:

    “How quickly we get there and if we do get there will be determined by how events unfold. We have an open mind, over the past two years we have been very flexible, it changed in response to changing circumstances and we will continue to do that… a more normal level. How fast we will get there will be determined by events.”

    That oughtta frighten the horses.

      • Narapoia451MEMBER

        The effects of that large an increase would annihilate the economies of Australia and definitely NZ. It was normal – I don’t think it will be again without an intervening catastrophe.

  8. The sky is falling!! The sky is falling!!

    Jesus Christ! The last time interest rates went up Robin Williams, Osama Bin Laden, Gadaffi, Kim Jong-il, Steve Jobs and Amy Winehouse were still alive. Japan had not been hit by massive earthquakes and nobody knew where Fukushima was. The Greek default was in the future, Julian Assange was still a free man and Charlie goddamn Sheen was still on Two and a Half Men. Prince William was single and the Chilean Miners had just been rescued the month before.

    Keeping interest rates so low for soooo looong is the definition of delusional, and has been instrumental in setting this country on the dark trajectory it is now following.

    And today they went up ZERO point two five percent.

    I mean just….wow. The sheer chutzpah is breathtaking.

  9. Normalise! 😂
    They have no idea how it works. With such massive levels of total debt (both gov & private) they will not be able to hold their so called “normal” rates. Normal rates are for when total debt for a country are normal which is well below 100% of gdp, eg 80%, when total debt is way above this level interest rates are forced very low! Unless debt levels are lowered there is no chance they can maintain so called normal rates for more than a
    few years.

    As for wage growth, this will undershoot expectations again in Australia as excessive immigration from lower wage countries shirts to impact the economy, they don’t see this as it’s forbidden

  10. pfh007.comMEMBER

    0.25% is just waffer thin.

    Wait until Adam and Lydia explain to people that public debt is wonderful because all those bonds are held by the private sector as interest bearing wealth assets..

    It will be government bonds au go go.

    It is good to see rates rising as it was embarassing listening to people who should know better demanding that interest rates be kept low just to keep a broken and dysfunctional private bank credit model of a public monetary system gasping for breath.

    Having said that they will need to work very hard to pump out more debt than “Scomo and Joshy” who have been doing a splendid job trying to buy this election.

  11. Magnus MaximusMEMBER

    I watched an interview with Paul Keating where he spoke about the late 80s and how he was hassling the RBA every day to lift rates as they were moving too slowly…I guess times haven’t changed

  12. GarethMEMBER

    My guess is that even with significant rate hikes it will make little difference to any demand driven inflation that exists in the economy. Wealthy boomers and asset rich are not affected by these hikes, only debt slaves who use their income to pay a mortgage. That $7.5T of housing wealth without any debt attached remains untouched.

    The rba shouldn’t have been the ones to control inflation, it should have been govt tax policy targeting unearned capital gains. Watch wealthy boomers cancel their land cruiser orders if they actually got taxed properly.

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