RBA set to lift rates to an 18-year high, markets widely expect

what happened

The Reserve Bank of Australia is expected on Tuesday to raise its official cash rate to 4.85% from 4.60%, according to financial markets. That would be the highest level in 18 years. Market Talk notes that the move is nearly 90% priced in after recent weak inflation data and fairly clear signals from the bank's senior management.

The central bank faces a difficult task. Risks of a recession next year are growing, while policymakers still need to bring inflation back to target. The bank has been open about the hard trade-offs, and the fallout for the economy could prove severe.

why it matters

For markets, the context matters: tightening comes as recession risk rises. A higher cash rate typically supports the Australian dollar and yields on local bonds, but it also weighs on shares and sectors sensitive to domestic demand. The decision will also show how far the regulator is willing to accept economic costs to bring inflation back to target.

market impact

Australian dollar and bonds: higher rate supports yields; recession risk weighs on shares.

• ▲AUD/USD pressure up — higher rates make Australian assets more attractive to yield-seeking investors
• ▼ASX 200 pressure down — recession risk cuts earnings of companies that rely on domestic demand

tags

instruments