RBA preview – likely 50bp hike incoming

Todays RBA policy meeting is expected by most analysts to result in a 50bp hike as the bank tries to play catch up and get on top of elevated inflation figures.

The slightly lower Q2 CPI  figures released last week has seen futures markets price out what was earlier feared could be a 75bp supersized move, a 50bp hike would see the bank able to respond further in September should the Wage price index data due on 17 August show an alarming increase in wage costs. A 50bp hike today will bring the cash rate up to 1.85% which means we would be looking at least a further 65bp of hikes coming to bring the cash rate to the neutral level of 2.5% indicated by RBA governor Lowe at the last RBA policy meeting.

Currently August rate futures are trading at an implied yield of 1.76%, pricing in a rise of 41bp which indicates traders are giving around an 80% chance of a 50bp hike. Bond traders are rarely wrong when this much is priced in so I expect a 50bp move today with the accompanying statement giving clues to Septembers meeting where it’s looking so far as a toss up between 25 or 50bp.

Expected AUD reaction

If a 50bp hike is announced, the most likely course in the short term for the AUD will be an initial spike up due to the markets only pricing in 80%, then volatility as the algos read the statement, and more volatility as humans get through it. Followed by a sustained move in either direction depending on how markets re-price after digesting what the RBA has released.

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