The RBA Expected hike 25bp

The Reserve Bank (RBA) is once again widely expected to announce a 25 basis point (bp) interest rate hike at its next boa, which would see the OCR at a 10-year high of 3.6%. We noted in their February meeting that the statement has a hawkish tone, and that the wording suggested at least two more hikes are in the pipeline.

The Reserve Bank of Australias nine-member board raised the cash rate by 25 basis points to 3.1%, the highest since November 2012.

“Inflation is too high,” said RBA governor Philip Lowe. “The board expects to increase interest rates further over the period ahead, but it is not on a pre-set course.”

Any adjustments to the wording of this sentence could be the difference between one or two more hikes from here – because a further increase over the months ahead would suggests one more hike is to follow, with a terminal rate at 3.85%.

With the likelihood that inflation has peaked, unemployment will slowly rise and growth will continue to soften, the case for the RBA to pause is certainly building. But the fly in the ointment is inflation above 7%, which means were likely to see at least two more hikes. But we can at least say with confidence that the RBA are much closer to the end of their tightening cycle, than the middle or the start.

Inflation may well have increased, to the relief of many. At 7.2%, it remains historically high and more than twice the upper range of RBAs 2-3% target inflation band, which clearly warrants further rate hikes. But as it has pulled back from a high of 8.4%, we can make a relatively safe assumption that peak inflation is behind us.

But with weaker than expected recent employment data, ABS retail sales for December down 3.9 per cent, unemployment in Australia remains historically low but it suggests a cycle low may have been seen at 3.4% in October. House prices still falling and large volumes of fixed rate mortgages set to expire this year, CBA economists believe the RBA will pause its tightening cycle thereafter. It also points towards a soft landing as opposed to a crash. All in all, it suggests the economy can handle higher rates, but it should also be remembered that employment is a lagging indicator.

AUD/USD , The Australian Dollar and the US Dollar pair belong the Majors, a group of the most popular traded pairs in the world. This pair's popularity soared because traders were attracted to the interest rate differential of the pair. This pair is oscillating within a sideways range, having failed to break below 0.6700. Whilst China‘s reopening has given the Aussie some support, the stronger US dollar is capping any upside. A hawkish hike could send the Aussie towards the 0.6800 level, near last week’s volume point of control at 0.6820 which can act as a magnet should prices rally. But as the trend remains bearish, we would seek bearish setups below 0.6850 should evidence of a swing high form, or wait for a break below 0.6700 to assumes trend continuation.