ASX 200 dives on RBA interest rate decision

Governor Philip Lowe flagged that Australians can expect further rate hikes ahead to temper hot running inflation.

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Key points

  • The RBA raised rates by 0.50% today, taking the benchmark rate to 0.85%
  • This is the second consecutive month of rate hikes
  • Governor Philip Lowe cautioned to expect more tightening ahead

The Reserve Bank of Australia (RBA) lifted its benchmark interest rate by 0.50% today to temper fast-rising inflation, which in the most recent quarter stands at 5.1%.

The central bank also increased the interest rate on Exchange Settlement balances by 0.50% to 0.75%.

This marks the second consecutive month of rate hikes from the central bank.

In May, the RBA raised the official interest rate for the first time in a decade. The bank boosted the cash rate from the all-time low 0.10% to 0.35%.

With today's hike factored in, the cash rate now stands at 0.85%.

The S&P/ASX 200 Index (ASX: XJO) fell 0.4% following last month's announcement.

Today investors are again hitting the sell button, as the rate hike comes in at the high end of analyst forecasts, with most economists having predicted a 0.25% or 0.40% increase. At the time of writing, the ASX 200 is down 1.5% for the day.

Here's what RBA governor Philip Lowe said about the bank's latest move.

RBA hikes interest rates to temper overly high inflation

Commenting on the RBA's decision to lift the interest rate again this month, Lowe said that while inflation in Australia was lower than many other nations are experiencing it had "increased significantly" and is "higher than earlier expected".

Unexpectedly high energy prices caused inflation figures to surprise on the upside.

Lowe pointed to continuing COVID-19 supply chain disruptions and Russia's invasion of Ukraine as major factors driving prices higher.

He added that domestic factors were conspiring to drive costs up too "with capacity constraints in some sectors and the tight labour market contributing to the upward pressure on prices. The floods earlier this year have also affected some prices".

Looking ahead, the RBA believes inflation will increase from the current 5.1% in 2022, but forecasts it will return to its 2% to 3% target range in 2023.

"Today's increase in interest rates will assist with the return of inflation to target over time," he said.

Lowe called the Australian economy "resilient", posting 0.8% growth in the March quarter and increasing 3.3% over the year.

Addressing the strength of the labour market, he said the current 3.9% unemployment rate was the lowest level in 50 years.

Lowe concluded:

Today's increase in interest rates by the Board is a further step in the withdrawal of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic. The resilience of the economy and the higher inflation mean that this extraordinary support is no longer needed.

What can ASX investors expect next?

Well, a few more hikes look almost certainly to be on the cards.

According to Lowe:

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

The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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