Quantitative Easing

All the alarms and no surprises from the RBA – ShareCafe

As widely expected, the Reserve Bank raised its benchmark rate by 0.50% for the second straight time at its monetary policy meeting on Tuesday, a move that will be followed by mortgage rate hikes from banks. .

It was the third rate hike in a month – May saw a 0.25% rise, then back-to-back half-percent hikes, taking the spot rate to 1.35%.

News of the rise stopped the ASX in its tracks, reversing an afternoon slide and pushing the ASX 200 up 18 points within minutes of the 2:30 p.m. release of Governor Philip Lowe’s decision and statement.

The index added more ground and peaked around 6,657 points earlier at 6,629, up about 10 points from the low before the RBA announcement.

The Aussie dollar firmed a bit around 68.78 US cents, but was off early trading highs closer to 69 US cents and had fallen to 68.55 early in European trading.

Investors ignored Governor Lowe’s statement warning of more rate hikes to come.

“Today’s interest rate hike is another step in the withdrawal of the extraordinary monetary support that has been put in place to help insure the Australian economy against the worst possible effects of the pandemic.” he said in the statement.

The RBA Governor highlighted what he called “the resilience of the economy and rising inflation”, meaning that “the extraordinary support from low interest rates and quantitative easing n is no longer necessary”.

Dr Lowe continued to stress that higher wage growth is imminent: “The Bank’s corporate outreach program and firm surveys continue to point to rising wage growth compared to the low rates of recent years, as companies compete for staff in the tight job market.”

The wage price index remained stuck at 2.4% in the March quarter, the same low rate as before the start of the pandemic more than two years ago.

So there will be more rate hikes, with Dr Lowe promising again (as he did in the June post-meeting statement and a 0.50% hike) yesterday in his statement:

“The Board expects to take further steps in the process of normalizing monetary conditions in Australia in the months ahead.

“The magnitude and timing of future interest rate increases will be guided by incoming data and the Board’s assessment of the outlook for inflation and the labor market.

“The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”

The hawkish tone of the post-meeting statement appears to have satisfied market economists and others who want big rate hikes to try to slow inflation.

That saw AMP chief economist Shane Oliver forecast a possible 0.50% rate hike in August.

“The RBA is likely to rise another 0.5% in August, but thereafter we expect more gradual moves as economic data slows, with the cash rate expected to rise to 2.1% by end the year with a peak of around 2.5% in the first half of next year, before rate cuts in the second half of next year,” he said.

“…the RBA just wants to slow things down to reduce pressure on inflation and give supply time to catch up. He does not want to crush the economy and is not on autopilot. So he will be watching spending indicators very closely and things like property prices,” Dr Oliver added in his note on the RBA’s decision on Tuesday afternoon.