The Reserve Bank of Australia’s (RBA) decision to hike the cash rate by 0.5% to 0.85% shows the board has clearly recognised they are well behind the curve, according to market commentators.
The RBA hiked rates at yesterday’s meeting by 50bps, a higher increase than had been expected by commentators and its second consecutive hike.
Firetrail Investments head of investment strategy, Anthony Doyle, said interest rates were now being lifted to more normal levels for an economy with 5.1% inflation and 3.9% unemployment rate.
“The RBA has been slow to recognise the inflation problem in the Australian economy, and in surprising the market today is trying to win back some of its inflation-fighting credibility,” he said.
“The RBA board has clearly recognised they are well behind the curve.”
Doyle expected interest rates to continue to increase at coming meetings, resulting in headwinds for the Australian economy as the credit taps continued to be tightened.
According to City Index market analyst, Matt Simpson, the RBA’s latest rate hike was the first 50bps hike since February 2000 and with a jump of 75bps in two meetings, the most aggressive back-to-back meeting on record.
“I really think the RBA have restored some credibility today by coming out swinging – they may have taken a leaf from the Reserve Bank of New Zealand’s book, but it needed to be done with inflation running so hot,” he said.
Speaking to journalists in Brisbane, Treasurer Jim Chalmers said the RBA’s rate call would be difficult news for Australians already facing skyrocketing costs of living and that the higher rates would also make it harder for the Government to service the national debt.
“The best thing that we can do as a government is to make sure that we grow the economy without adding these inflationary pressures, that we get real wages moving again and that we actually have something to show for this trillion dollars in debt that our predecessors have racked up.”
Mutual Limited chief investment officer, Scott Rundell, said underlying rates remained accommodative in a historical context but the pace of the move and the knowledge that prices across staple goods were rocketing presented challenges for households to digest.
“A head of lettuce at $10.00 anyone?” Rundell said.
“House prices will likely continue to moderate, but nothing too aggressive just yet. Sales volumes are moderating and we’re not seeing any panic selling and nor do we expect to. Key for housing is unemployment, which remains robust.
“As for the RBA’s credibility, central banks are always mindful of self-fulfilling prophecies, but even so, they missed the inflation signals early on in the peace and a 50bps hike smells a touch of, not quite panic, but signs that they’re trying to catch up with the runaway inflation bus.”
Rundell said the risk of more aggressive future rate hikes could not be ignored given uncertainty around supply chain constraints.
“If these persist inflation could remain stubbornly high. The RBA appears confident that inflation will revert to target range by next year, but much depends on clearing supply chain blockages and some form of resolution around Ukraine.”
