RBA Underwhelms With Small Rate Hike

10/04/2022

1 minute read

2022.10.04 08:41

MarketPulse

started the day with losses but has since recovered. The Aussie is trading at 0.6540, up 0.37%.

RBA surprises with a 0.25% hike

The Reserve Bank of Australia was widely expected to deliver a fifth consecutive hike of 50 basis points at today’s meeting, but the bank the markets with a small increase of 0.25%, which raises the cash rate to 2.35%.

Governor Lowe had signaled that he would ease up on the 0.50% increases. Still, with running at 6.1% and not giving any indications of peaking, expectations were for the bank to deliver at least one more 0.50% hike. Interestingly, the RBA statement acknowledged that inflation has not yet peaked and is expected to rise to 7.75% in 2002 before dropping to 4.0% in 2023.

Why did the RBA ease up if soaring inflation has not yet been beaten? The answer is likely related to the continuing global economic uncertainty – China’s economy has been slowing, and the war in Ukraine is escalating, with Europe facing an energy crisis this winter.

The RBA statement mentioned that inflation and the labor market would be important factors in future rate policy, but Lowe & Co. will also be closely eyeing global developments. The RBA is also anxious to prevent a recession due to the sharp tightening in recent months, and a 0.25% hike will be easier for the economy to absorb than a 0.50% increase.

Over in the US, the Fed hasn’t signaled it would change its aggressive tightening stance. Still, there are signs that the economy is slowing down. On Monday, the dropped to 50.9 from 52.9, barely in expansion territory and its lowest level since May 2020. The Fed will continue delivering outsized rate hikes until inflation is unmistakably moving lower.