The ASX 200 fell 0.6% and three-year government bond yields, which reflect interest rate expectations, added 8 basis points to 3.23%. The 10-year rose 8 basis points to 3.60%.
“Overall, the RBA remains hawkish – which is understandable given the scale of the inflation challenge and the resilience/buffers across the economy,” said Andrew Boak, chief economist for Australia at Goldman Sachs. He predicts that the spot rate will climb to 4.1% by May.
“Risks remain tilted towards a slower and longer cycle, but today’s hawkish statement reinforces our view that several more rate hikes are on the way,” he said.
The ABC and RBC Capital Markets raised their cash rate forecast to 3.85% from 3.6%.
“Inflation is uncomfortably high, and the renewed focus suggests the RBA will shift policy settings to a more restrictive stance,” said Su-Lin Ong, chief Australian economist at RBC. She drew follow-up moves in March and April.
A big test for the RBA will be the December Quarter Wage Price Index report, due later this month.
“Given the importance of avoiding a price-wage spiral, the council will continue to pay close attention to both the evolution of labor costs and the pricing behavior of companies. in the coming period,” the RBA said.
Bond markets are now implying that the spot rate will peak at 4% in August, from 3.8% before the policy decision.
But Pendal thinks the RBA will only raise the exchange rate once.
“Inflation data in the coming months will moderate enough for the RBA to pause,” Mr Hext said. He described March as a “deal done” with another quarter-point increase: “By April they’ll have another CPI which will be a bit lower and give them a chance to take a breather.”
Improvements in sight
The RBA reiterated its forecast of around 1.5% economic growth in 2023 and 2024. Inflation is expected to fall to 4.75% by Christmas.
She said core inflation – the bank’s preferred measure – was higher than expected at 6.9% in the December quarter and reiterated her aim to bring price growth back into her target range of 2% to 3%. That won’t happen until mid-2025.
The risk that high inflation could take root in people’s expectations suggests the RBA wants to maintain a firm tightening bias, said Josh Williamson, head of economics at Citi.
“Higher inflation and a still tight labor market suggest the board will likely need to hike more than 25 basis points twice in March and April, for a final policy rate of 3.85%,” said Mr Williamson.
Financial markets expect interest rate cuts next year.