RBA Surprises the Markets with a 25-Basis Point Rate Hike

The RBA caught the markets by surprise, unexpectedly hiking the cash rate by 25 basis points this morning. The latest rate hike took the Cash Rate to 4.10%. Additionally, the RBA increased the interest paid on Exchange Settlement balances by 25 basis points to 4.00%.

In April, RBA Governor Philip Lowe warned that a pause did not mean an end to the monetary policy tightening cycle. Since the April warning, the RBA has hiked the cash rate by 50 basis points.

According to the RBA Rate Statement,

• While inflation has passed its peak, it remains too high and will take some time before returning to the target range.
• This increase in interest rates will provide greater confidence that inflation will return to target within a reasonable timeframe.
• The Board remains alert to the risk that expectations of ongoing high inflation contribute to larger increases in both prices and wages. Therefore, the Board will closely monitor labor costs and price-setting trends.
• Notably, the Board aims to keep the economy on an even keel while bringing inflation to target, but the path to achieving a soft landing remains narrow.
• Household consumption and the global economic outlook remain uncertain.

The Rate Statement concluded that further tightening of monetary policy could be needed to ensure inflation returns to the target range in a reasonable timeframe. RBA focal points will include the global economy, household spending trends, and the outlook for inflation and the labor market.

AUD/USD Reaction to the RBA Interest Rate Hike

Before the RBA interest rate decision, the AUD/USD fell to a low of $0.66096 before rising to a pre-RBA high of $0.66287.

However, the AUD/USD surged from $0.66260 to a post-RBA high of $0.66733 in response.

This morning, the AUD/USD was up 0.65% to $0.66598.

Next Up

It is a quiet US economic calendar, with no economic indicators to move the dial. The lack of economic indicators will leave Fed chatter to influence. After ISM Non-Manufacturing PMI numbers on Monday, the markets remain uncertain about the June policy decision. There is also uncertainty on whether more rate hikes are likely in the proceeding months.

According to the CME FedWatch Tool, the probability of a 25-basis point June interest rate hike slipped from 25.3% to 21.2% on Monday versus 64.2% one week earlier.