Quicknote: RBA raises as expected but sounding cautious

The RBA increased rates by 25 basis points as expected and has left the door open for more hikes which is understandable given the higher than expected December inflationary numbers. We think the chance of another 25 basis point hike next month is still 50/50, only weighed down by the chance that there is more confirmation of falling inflation.

There is a changing of mood though within the statement. Two key things stood out for us. The RBA is clearly worried about the lagging impact of its hikes on mortgage holders. It’s probably even scared. It doesn’t sound comfortable and sees the potential risks with moving up much more, even though inflation needs to be addresses. This is a much more balanced approach. Perhaps even dovish.

The second thing which stood out is the admission in the last paragraph that “that this period of high inflation is only temporary”. The RBA clearly sees inflation trending lower in the medium term and that is reflected by bond markets where yields have barely risen on the 2 year note over the past few months.

Bottom line: The RBA needs data to pause and we could start to get that in the next couple of months as retail sales slow and inflation shows signs of peaking. It’s hard to predict with precision, but we think the dovishness will start to rise towards the second half of the year as the lagging impact of higher rates starts to work through. In the meantime, there’s no change to our assumptions.