RBA Update
The Reserve Bank of Australia (RBA) surprised most lifting rates by 0.50% at their June meeting, taking the cash rate to 0.85%.
Market expectations were for a 0.25% rise with the upper range of expectations for a 0.40% rise.
The RBA either has 2 things in mind:
- Inflation is heading higher than they previously thought and/or maybe more entrenched than previously thought.
- Their rate hike window is a lot shorter than they previously thought which means they have a small window to get rates higher and build a buffer leading into the next economic downturn.
If it is the latter, then it means the RBA will need to get to their neutral rate setting (ie. neither expansionary or contractionary policy) quicker than previously thought which means faster and potentially bigger rate hikes in the short term before they stop themselves out, likely by the end of the year.
- The RBA likely raises rates another 2-3 times before the end of the year before pausing or waiting for new economic data to see how far they can take rates beyond that without causing a significant decline in economic growth (ie. engineer a soft landing).
- It will be interesting to see if rates get as high as the market is currently implying (ie. 3.11% by year-end & 3.85% in a year's time).
Written by Chris Lioutas, Insight Investments