RBA hike rates by a supersized 50bp and pile pressure on ASX200

At its monthly meeting this afternoon, the Reserve Bank Board surprised the market and raised its official cash rate by a supersized 50 bp from 0.35% to 0.85%.

In the lead up to today's meeting, market pundits were split between a 25bp hike and a 40bp hike. The interest rate market was caught in the middle at 35bp.

The trigger for the 50bp hike is a more determined attack by the RBA on above target and still accelerating inflation.

In Q1 2022, headline inflation hit 5.1% and core inflation hit 3.7% - 70bp above the RBA's 2-3% target. In the May statement, the RBA revised its inflation forecasts to around 6% by year-end and for core inflation to rise to 4.75%.

Today, the RBA noted upside risks to its inflation forecasts coming from floods in NSW and QLD and rising electricity and gas prices. It also stated that it's not just global factors playing a role and that "domestic factors are playing a role too now."

The statement noted the ongoing tightness in the labour market. The unemployment rate at 3.9% sits at 50-year lows and is expected to fall further. A factor that is expected to lift wage growth and inflation.

"The Bank's business liaison program continues to point to a lift in wages growth from the low rates of recent years as firms compete for staff in a tight labour market."

Today's move by the RBA echoes recent moves by the Federal Reserve, the RBNZ and the Bank of Canada, who have all front-loaded with 50bp rate hikes, rapidly becoming the new normal.

While the RBA's forward guidance wasn't as clear as its central bank peers, the door is open for the RBA to lift by another 50bp rate hike next month as the RBA takes the cash rate back towards the neutral rate of 2.50%.

"The Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead. The size and timing of future interest rate increases will be guided by the incoming data and the Board's assessment of the outlook for inflation and the labour market."

What does it mean for the ASX200?

In the lead up to today's RBA meeting, the ASX200 was straining under the weight of higher yields and lower U.S equity futures after U.S 10-year yields stormed higher to close above 3% for the first time in nearly a month.

The expectation of a more aggressive RBA hiking cycle is viewed as a negative to the ASX200 in the short term.

After rejecting the resistance coming from the 200-day moving average last week up near 7300, today's break of support at 7100 is viewed as an indication the ASX200 is on its way towards the bottom of its nine-month range 6950/6750 area.

Source Tradingview. The figures stated are as of June 7th 2022. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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