RBA raises interest rates 25bps to 2.85%

About the author:

Andrew Tang
Author name:
By Andrew Tang
Job title:
Analyst - Equity Strategy
Date posted:
01 November 2022, 2:00 PM
Sectors Covered:
Equity Strategy and Quant

Last week’s higher inflation print (7.3% vs 7.0% consensus, 6.1% in Q2) was not enough sway the RBA from the expected 25bps increase. The RBA had slowed policy tightening to 25bps from 50bps at its last meeting.

The board indicated today that further increases will be required in the period ahead, but the timing will be determined by the outlook for inflation and the labour market. Inflation ticked up over the month from 6.9% in August to 7.3% in September, while unemployment remained at a multi-year low of 3.5%.

The RBA’s forecast for both indicators will likely be revised again, but we don’t think this will alter the flatter interest rate trajectory that the Bank has chosen to take.

So where to from here?

Our economist, Michael Knox, maintains the view that our cash rate will follow the Fed given the ongoing risk of exacerbating currency distortions, but the rate rises will occur at a reduced pace.

So rather than reach the terminal cash rate of 4.6% in early 2023, the RBA will move in 25bps increments getting to the same point by mid-2023.

What does this mean for the Australian economy and markets?

Despite all the talk about recession and weak consumer sentiment, retail trade and labour data released last month remained robust. Retail trade has grown consecutively month-on-month since the start of the year and is consistent with our view that Australian consumers still have elevated savings to run down, which we expect to continue to support economic growth.

Similarly, the labour market appears resilient as job vacancies remain elevated with labour supply in some sectors unable to meet demand. The high vacancy rate also demonstrates increased labour mobility, suggesting that we are still far from an imminent economic slowdown.

As our recently published Q4 Asset Allocation explained, the resilient earnings outlook assisted by higher commodity prices will see Australian equities outperform global peers. Compared to peers, the RBA’s slower pace of interest rate rises supports this view.

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