Australian Dollar Declines on Surprise 25bp RBA Hike

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The Australian Dollar was lower after the Reserve Bank of Australia (RBA) signalled the top in Aussie interest rates was nearing after it delivered a 25 basis point interest rate hike.

The move surprised markets that were expecting another 50bp hike.

The RBA said in a statement further increases in interest rates were still required to bring inflation down, however economists suggest only one more hike now looks likely.

The Australian Dollar was softer against the majority of G10 currencies following the 'dovish' outcome: the Pound to Australian Dollar was higher by a third of a percent at 1.7480, its highest level since early August.

"AUD is a significant underperformer after the RBA hiked 25bp against a consensus for a 50bp move," says Adam Cole, Chief Currency Strategist at RBC Capital Markets.

The Australian Dollar was however better supported against a broadly weaker U.S. Dollar, with AUD/USD seen at 0.6502 at the time of writing.

"The RBA has slowed down the pace of their tightening cycle. On that score the RBA has bucked the trend of the other major central banks in today's decision to raise the cash rate by 'only' 25bp," says economist Gareth Aird at Commonwealth Bank of Australia (CBA).

The RBA has now hiked interest rates on six consecutive occasions, taking the cash rate to 2.60%, something Governor Philip Lowe said was a "substantial" pace of tightening.

"The RBA has now delivered an incredible amount of monetary policy tightening in a very short space of time. The RBA’s 25bp hike today means that they have taken the cash rate up by 250bp between 4 May and 4 October – over just five months," says Aird.

CBA now looks for a further and final 25bp hike in November.

The RBA's rate hiking cycle could deprive the Australian Dollar of rate support going forward, however on analyst suggests the outlook for the currency is in fact bright.

"Smaller 25bps hike from RBA was coming. And yes it does have signal for other countries. Central banks are grappling with inflation and other growth/leverage factors. More CBs will be taking it slow in Q4. AUD a buy on less aggressive hikes & better growth once dust settles," says Viraj Patel, macro strategist at Vanda Research.

But analysts at ANZ say the RBA's job is not done.

"We still expect the RBA to tighten by 25bp in November, taking the cash rate target to 2.85%. But there is a bigger question mark over whether the RBA will go again in December as we previously expected," says David Plank Head, of ANZ Economics.

ANZ expects the cash rate will need to move into clearly restrictive territory of more than 3% to ensure inflation does return to target.

"The slower pace of rate hikes now points to the tightening cycle extending into 2023," says Plank.

Plank notes market expectations for future interest rate increases have plunged as a consequence of the 25bp decision and overall tone of the statement.

Three-year ACGB futures are trading at an implied yield of 3.3% in the wake of the decision, almost 40bp below Monday’s close.