The RBA Board today stepped up the pace in normalising policy from the emergency settings required during the pandemic, hiking its key rates by a larger-than-expected 50bps. This takes the cash rate target to 0.85% and the rate on Exchange Settlement balances to 0.75%.
Today's decision to hike by 50bps was very much at the hawkish end of outcomes expected by markets and analysts ahead of the meeting (see here). However, the move was consistent with the main theme from the May meeting where the Board stated its intent to withdraw "extraordinary monetary support". A 25bps increase initiated the hiking cycle last month, and with the pace ramping up to a 50bps hike today, consistent with recent moves from the likes of the Fed, RBNZ and BoC, the policy rate in Australia is now just above its level from before the pandemic (0.75%).
RBA Governor Philip Lowe's decision statement indicated that inflation was likely to reach a higher peak in 2022 than it anticipated last month (5.9%). In May, the inflation outlook was lifted sharply, mainly stemming from the disruptions to global supply chains from Covid lockdowns and the war in Ukraine but also reflecting building capacity constraints in the domestic economy, including from the tightening labour market. With the hiking cycle now well underway, the RBA forecasts inflation will moderate next year but remain above the 2-3% target until 2024, leaving it with more work to do.
The RBA clearly has a great deal of confidence in the ability of the Australian economy to withstand this hiking cycle. Governor Lowe emphasised today that the Board is hiking into what are strong economic conditions, bolstered by the income boost from a record high terms of trade. The growth outlook in 2022 is underpinned by consumer demand, rising business investment and the residential construction pipeline. The RBA also expects labour demand will drive down unemployment even further from its near 50-year low of 3.9%.
Going forward, Governor Lowe noted the Board will be attentive to data on the consumer and how demand evolves given the present crosscurrents from strong balance sheets and high savings on the one hand but squeezed real incomes and rising rates on the other. The economic outlook offshore was also identified as crucial, with growth prospects increasingly under pressure.
In closing, Governor Lowe signalled further hikes are to follow, with the trajectory for rates over the back half of the year to be guided by the data and its assessment of the outlook for inflation and in the labor market. Markets are pricing the cash rate to rise to around 2.75% by the end of this year. I see the RBA taking a more cautious path, with rates ending the year closer to 2%. The next event of note from the RBA is a speech from Governor Lowe on 21 June (10am AEST), with the minutes from today's meeting released later that morning.