A 25 bps hike was expected and some investment banks had seen the case for a 40 bps rate hike. However, a 50 bps rate hike took markets by surprise and the AUD is quickly re-pricing the move. So, what prompted the move? In a word, inflation. The RBA like many central banks around the world is struggling to keep on top of surging inflation. A string of central banks have been turning more hawkish recently as inflation pressure looms

The inflation factor

The RBA lay the cause of inflation down to COVID-related supply chain disruptions, the war in Ukraine, and high energy prices, but also looked at domestic factors. Ironically, the tightest labour market in 50 years, with record-low unemployment down at 3.9%, is making inflationary pressures worse.

The economy

The RBA is confident that the higher interest rates can be managed. Household and business balance sheets were generally seen to be in good shape and there was a general upswing in the business noted. Household spending is a source of uncertainty for the RBA though it recognises that household saving rates remain high.

The China factor

One key uncertainty for the RBA is how COVID develops in relation to China. Sentiment has recently turned higher as Beijing and Shanghai come out of recent COVID curbs. However, with so much of Australia’s economy being linked to how China is doing this is a key factor in how aggressive Australia can be in hiking rates. See here for more details on the factors influencing China and its Covid policy.

The AUDNZD buy bias

This gives a clear AUDNZD buy bias with buyers reasonably expected on dips. Should monetary policy fundamentally change for either the RBA or the RBNZ this would impact this outlook.