The Reserve Bank of Australia boosted its cash rate by 25 basis points on Tuesday to 0.35% – its first rise in more than a decade, which was 10 basis points larger than expected.
RBA governor Philip Lowe said inflation had “picked up more quickly, and to a higher level, than was expected” and given the low level of interest rates, he felt it “appropriate to start the process of normalising monetary conditions”.
Lowe said the outlook for economic growth remained positive – unemployment was tipped to decline to 3.5% in early 2023, “which would be the lowest rate of unemployment in almost 50 years”.
The Aussie dollar rallied after as the RBA signalled further rises in coming months
That left the Aussie up 0.9% at $0.7109, away from a three-month low of $0.7030 hit overnight. The bounce ran into profit-taking at $0.7148, however, suggesting risks were still to the downside.
The New Zealand dollar popped higher initially at $0.6474 but also ran into selling. It was last flat at $0.6423, and only just above its lowest since mid-2020 at $0.6413.
Both currencies have been losing ground to the safe-haven US dollar as fears of a recession in Europe and lockdowns in China undermine risk assets.
The futures market took the RBA statement as reasonably hawkish and moved to narrow the odds on a hike in June to 0.75%, rather than 0.5%.
“Does it mean that they will do 40 basis points in June, so we are up to 75 basis points? It is certainly possible,” Ray Attrill, head of FX strategy at NAB, said.
“It looks like their narrative and the inflation forecasts that they’re hinting at comes across as fairly hawkish.”
More Urgency Worldwide
Markets have long been betting on an early tightening and rates of 2.5% by Christmas, in large part because most other major central banks have been acting with a lot more urgency.
The US Federal Reserve is widely seen raising rates by half a point on Wednesday from the current spread of 0.25% to 0.5% to reach 3% or more by year end.
Yields on Australian three-year bonds shot up 14 basis points to their highest since late 2014 at 2.971%, while 10-year yields rose almost 10 basis points to 3.35%.
“The RBA has begun its tightening cycle at a faster pace than consensus and hinted at the potential for even larger rate hikes in the future if necessary,” Damien McColough, Westpac’s head of rates strategy, said.
“That should keep the broad yield curve flattening trend in place for now. It also suggests that selling rallies remains the appropriate tactical approach.”
• Reuters with additional editing by Jim Pollard
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