RBA rate rise sends market higher

The Reserve Bank of Australia (RBA) has today lifted their cash rate by another 50 basis points, taking the rate to 1.85%. Rate rises have been occurring at a rapid pace to deal with inflation and consumer price increases.

While conventional wisdom would suggest that rate rises are bearish for the equity market, Australian shares have rallied on the back of the announcement.

The 50-basis point rise had been well signalled to the market by RBA officials in the lead-up to this statement, giving the market more than enough time to adjust to the change in policy rate.

More importantly, in the accompanying statement RBA Governor Philip Lowe because noticeably less hawkish; in previous months he assured the market that further significant rate rises were coming in the months ahead.

In today’s statement he was more circumspect, stating: “The Board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a pre-set path.” (Emphasis mine).

The statement also acknowledged that a lot of the drivers of price increases were outside the RBA’s control, implicitly acknowledging that further domestic rate rises won’t help correct these inflation drivers.

Today’s statement represents a departure from the strong hawkishness of the past few months, and the stock market has reacted as such.

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