“There has been a substantial cumulative increase in interest rates since May. This has been necessary to ensure that the current period of high inflation is only temporary,” Reserve Bank governor Phillip Lowe said today.
“High inflation damages our economy and makes life more difficult for people. The board’s priority is to re-establish low inflation and return inflation to the 2-3% range over time.”
And with those words Australia heralded a further 0.25% cash rate rise, raising it to 3.10%, the highest level since 2012.
The likelihood of the decision this morning, drove the market down, with the downward trend continuing throughout the day.
By day’s end, the S&P/ASX200 dropped 34.30 points or 0.47% to 7,291.30. Over the last five days, the index has gained 0.52%, but is down 2.06% for the last year to date.
The bottom-performing stocks in this index are Novonix Ltd (ASX:NVX) and Ramelius Resources Ltd, down 7.52% and 7.35% respectively.
Looking at the sectors, Industrials and Utilities led the way up 0.55% and 0.44% respectively. Information and Technology and Real Estate were the biggest losers, down 2.11% and 1.08% respectively.
Making news today
Cash rate rises 0.25%
Economists predicted a 25 basis point cash rate rise and that is exactly what they got.
While some believed the RBA could go harder, as there will be no movement in January, Governor Lowe stuck pretty much to script.
The hike comes just a week after Lowe’s hollow apology for people’s misinterpretation of his comments about interest rates standing still until 2024.
According to Stake's ASX Equities analyst Dylan Zhang, investors had already factored the move in.
“Today’s RBA rate hike will not come as a surprise to most investors, given that inflation is still considerably above the target. That said, there are positive signs that market confidence is growing when compared to the previous hike.
“In November, we saw a 19% increase in buys on Stake when compared to the previous month which was primarily driven by consumer price index reports in the US and Australia, and the subsequent rally that followed.
"Meanwhile, the BetaShares Australian Equities Strong Bear Hedge Fund, which investors have used to seek returns during market pullbacks, saw a 53% reduction in activity in November as investors anticipate more growth.
“That said, while some signals have shown a slowdown in inflation, with the latest numbers coming in at 6.9%, we’re still considerably above the RBA’s target of 2-3%. CPI inflation appears to be slowing but the consistently hot jobs market suggests we’ve still got some way to go before we reach the peak.
“Signs currently point to a peak RBA cash rate of 4% in 2023, but there is still lots of uncertainty.
"For instance, the news of China’s easing lockdowns could help to reduce supply-side inflation in 2023, but the extent of this new policy is yet to be seen.
"If we do see this come into play, we can expect energy and commodity stocks to benefit. This could also have a positive impact on the Aussie dollar, with China being Australia’s largest trading partner.
Insight Investment portfolio manager Harvey Bradley echoed a positive sentiment.
“Recent commentary has clearly signalled a desire to balance the growth and inflation outlook from here and should the activity data continue to roll over it is likely they will pause sooner rather than later," Bradley said.
"In our view, Australian government bonds are now getting close to fair value, both in outright yields and also relative to other major markets. "
CreditorWatch chief economist Anneke Thompson pointed to the financial burden many families may now face.
“Today’s decision by the RBA to further raise the cash rate will place undeniable financial pressure on Australian households,” Thompson said.
“Combined with the Budget’s forecast rising prices on everyday goods, housing and energy, and lacklustre wages growth, this latest increase in the cash rate all but guarantees consumer confidence will weaken as we enter the busy Christmas retail period.
“Data and forecasts released in the latter half of October all point to difficult economic conditions in 2023. The RBA board will likely have carefully considered labour force data, which showed that the unemployment rate has stagnated at 3.5%, employment growth has slowed dramatically, and Job Vacancies have stopped rising.
“Data from employment marketplace SEEK also points to a slowdown in jobs growth, with job ads declining month on month for four months now and by 5.2% over September 2022, the largest decline all year.
"And in a sign that increasing migration is starting to help employers fill more roles, there was a 10.3% increase in applications for job ads month on month, the greatest rise since April 2020.
“The RBA has a dual role to maintain inflation within the target band of 2 and 3% and also maintain full employment. Clearly, those two aims are incompatible in the current environment, as it will be almost impossible to bring inflation back to the target band if employment remains ‘full’.
"As a result, the RBA will be relieved to see the labour market slowing, as it is essential to help them get inflation back under control.
“It is likely given all signs are pointing to a weakening economy, that the RBA will take slower steps in tightening monetary policy, as they try to avoid sending Australia into recession.
"Despite continuing very strong Business Sentiment, CreditorWatch data reveals businesses are starting to feel more financial pressure, with B2B Trade Defaults and Court Actions rising on a trend basis.”
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