Fed rate rise breaks 28-year record. Will the RBA increase interest rates as aggressively?

The Federal Reserve just made a huge hike to interest rates in the US…

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Key points

  • The US Federal Reserve has made its biggest interest rate hike in almost 30 years
  • The Reserve Bank of Australia is expected to follow suit next month with another large increase
  • The market expects the cash rate to be almost 4% by the end of the year

Overnight, the US Federal Reserve made its biggest interest rate rise in almost 30 years.

The central bank outraised the RBA by increasing rates by a sizeable 0.75%. This took the level of its benchmark funds rate to a range of 1.5% to 1.75%, which is the highest level since just before the COVID-19 pandemic began.

But it won’t be stopping there. The Fed stressed that it is “strongly committed to returning inflation to its 2 percent objective.”

As a result, the Federal Reserve is forecasting a benchmark rate of 3.4% by the end of the year.

Will the RBA increase interest rates as aggressively?

In light of the Fed’s overnight raise and the outlook for further increases in the coming months, investors may be wondering if the RBA will increase interest rates just as aggressively.

Well, unfortunately for borrowers, our central bank looks likely to be increasing rates at a similarly rapid rate.

According to the latest RBA Rate Indicator, which is based on cash rate futures, the market is pricing in an 87% probability of Governor Lowe and his team increasing the cash rate by 65 basis points to 1.5% at the start of next month.

But the central bank will only be warming up at that point. Cash rate futures are pointing to the RBA increasing interest rates at each meeting through to December.

At that point, the market is pricing in a cash rate of 3.895%. That’s an incredible ascent when you consider that the cash rate started the year at a lowly 0.1%. It is also almost half a percentage point ahead of what is expected in the United States.

Time will tell if the RBA increases interest rates as aggressively as expected but I wouldn’t be betting against it in the current environment. These certainly will be interesting times for the ASX 200 index, Commonwealth Bank of Australia (ASX: CBA), and the rest of the big four banks.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. 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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