In the wake of a yesterday’s larger than expected rate hike, it’s difficult to foresee the RBA’s future actions based on its statements and forecasts, according to T. Rowe Price Associate Portfolio Manager Scott Solomon.
Responding to the rate hike, Solomon said: “The Reserve Bank of Australia (RBA) pivoted hawkish and did so with a bang, raising rates to 35bps, which was higher than what market anticipated.
“This comes after more than 12 months of dovish commentary (including a very firm view of no hikes until 2024) and underwhelming economic forecasts.
“After the Yield Curve Control (YCC) removal back in October last year and now surprising the market with a larger than expected hike, it’s very difficult to foresee RBA’s future actions based on its statements and forecasts.
“The RBA was very specific in the previous statement that they wanted to review inflation and wage data over the next several months.
“While Q1 headline CPI was high, it was not outside the band of reasonable expectations, and the more preferred RBA measures of the trimmed mean and weighted median were effectively in-line with the market.
“I think what the market wants is an answer to what caused the RBA to finally flip the switch. The market had been screaming about factors that would imply and demand potential rate hikes and the RBA had in the past responded with a call for patience, and grim economic forecasts followed by reminders of how inflation is different in Australia.
“What is next? The language is indicative of several hikes in a row and it’s important not to ignore the Board’s announcement that they will not reinvest proceeds of maturing government bonds.
“They further noted that they are not currently planning to outright sell bonds held on the balance sheet but given the constantly changing views of the RBA, this could change.”