RBA surprised markets with a 25 bps rate hike – UOB

Economist at UOB Group Lee Sue Ann reviews the latest RBA decision to raise the cash rate by 25 bps at its meeting last Tuesday.

Key Quotes

“The Reserve Bank of Australia (RBA), at its meeting on Tue (3 May), announced an increase in the cash rate target by 25bps to 0.35%. It also increased the interest rate on Exchange Settlement balances from 0% to 0.25%. This is the first rate hike since late 2010, and the move was larger than market expectations for a 15bps increase. The RBA also decided to not reinvest the proceeds of the Bank's government bond holdings as they mature.”

“We were looking for the RBA to move only in Jun, largely due to two key reasons.The first was the concern on how a first rate hike in over a decade would impact the outcome of the Australian general elections on 21 May. The second was that we thought the RBA would prefer to wait for 1Q22 wage data due for release on 18 May. Clearly, the need to address inflation outweighed the two key reasons mentioned above.”

“The earlier and larger-than-expected move by the RBA yesterday implies a more aggressive tightening path than we previously projected. The next RBA meeting is on 7 Jun, and at this juncture, we look for another 25bps increase in the cash rate target to 0.60%. However, we are still of the view that the RBA will remain cautious relative to its global peers as far as monetary policy tightening is concerned. We will be firming up our RBA rate hike trajectory following the wage price data release on 18 May.”