What did the RBA say that sparked the ASX relief-rally?

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by Melissa Darmawan

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The Reserve Bank of Australia’s (RBA) minutes from their June meeting noted that members considered a case for a 25 basis point or 50 basis point rate hike, before settling for the option of 50 basis points to 0.85 per cent on the back of low interest rates, a tight labour market and a shifting inflation mindset.

The board saw a material risk around inflation if policy settings were maintained after economic data showed that inflation continued to move higher.

The RBA's preferred inflation gauge, the trimmed mean consumer price index rose by 3.7 per cent year-on-year, the fastest pace in 12 years, exceeding the midpoint of the central bank’s 2 to 3 per cent target.

On the pace of policy tightening, the RBA noted sequential 25 basis point hikes represented a steady approach due to its regular meetings held monthly and that a year-end cash rate of 2.1 per cent would still represent rapid tightening.

Members also considered the risk to household consumption, which was weighed up against the large savings buffer that will support spending. According to the Australian Prudential Regulation Authority, Australians are sitting on $1.27 trillion in savings, an increase of 22 per cent to $281 billion since the pandemic. The RBA pointed out that its central scenario assumes that consumption growth will remain strong in the face of additional rate hikes.

However in governor Philip Lowe's speech today prior to the release of the meeting minutes, Mr Lowe was asked if he would follow the US Federal Reserve with a 75 basis-point hike next month. Mr Lowe said the board will be “having the same discussion” on the size as it did two weeks ago, prompting investors to interpret that a 75 basis-point hike is off the table for the July meeting and put risk back on the table. The ASX 200 continued to climb into the close led by a rally in major banks. The rebound came after the S&P/ASX bank index posted its worst two-week fall last week since the start of the Covid-19 pandemic in March 2020.

Looking ahead, the RBA will receive second-quarter inflation data in late July as well as updated quarterly economic forecasts which might change the path forward around its focus to crimp inflation.

Sources: RBA, Bloomberg, Factset, Trading Economics, Australian Bureau of Statistics

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