Laid Lowe

Philip Lowe finally ran out of “patience.”

After months spent insisting the RBA would wait to hike rates despite a coordinated shift from the bank’s global peers, Lowe acquiesced on Tuesday with a 25bps move. It was the first hike since 2010 (figure below).

Lowe called the decision “preemptive” — a shot across the bow aimed at ensuring “inflation psychology” doesn’t “shift in a durable way due to the recent higher inflation outcomes,” as he put it.

“Given the outlook for the economy and inflation, further normalization of interest rates will be required,” Lowe went on to say.

Although many market participants expected a hike (albeit a smaller increment), Tuesday’s move felt like a surprise. It was the culmination of an about-face eight months in the making.

The RBA was forced to abandon its yield-curve control regime late last year when yields on the target note rose to eight times the cap (here, here and, for the coup de grâce, here). But Lowe steadfastly refused to countenance the idea of aggressive rate hikes to combat inflation. In fact, he was reluctant to entertain any hikes at all in the near-term, repeatedly insisting rates would likely remain at record lows until 2024. The market never believed him.

“I acknowledge that this increase in interest rates comes earlier than the guidance the Bank was providing during the dark days of the pandemic,” he said Tuesday. To me, that came across as disingenuous. Lowe was providing similar guidance long after most observers called an end to COVID’s “darkest days.” He continued: “As things turned out, the economy has been much more resilient than was expected, which is clearly a welcome development.”

What’s not a welcome development, some argue, is the surge in inflation. The trimmed mean gauge, which strips out large increases and decreases, breached the upper-end of the band during the March quarter (figure below).

For markets, that sealed the deal. That print (represented by the orange point in the figure) compelled swaps to price a hike for today’s meeting.

Nevertheless, it wasn’t a done deal. In addition to his own reputation for caution, Lowe was contending with politics. A federal election is just weeks away. The Morrison government described Tuesday’s hike as confirmation of Australia’s “economic strength and resilience.” The Labor Party had a slightly different take, calling the move emblematic of “a full blown cost-of-living crisis.” Australia is an indebted society. And, as is the case in the US, prices are rising faster than wages.

Whatever it was domestically, the RBA’s hike was a notable development in the global macro context. If you don’t count Haruhiko Kuroda, Lowe was the last holdout. Tuesday’s move came just four business days after Sweden surprised with what one analyst described as a “record-large” hawkish pivot.

As the last dove outside the BoJ fell, so did bonds. Three-year Aussie yields rose some 20bps to exceed 3% for the first time since 2014 (figure below).

Meanwhile, 10-year yields in Germany hit 1% for the first time since 2015. Markets now see almost four 25bps hikes from the ECB in 2022. That would’ve seemed unthinkable just a few months ago.

All of this with the Fed and the BoE on deck later this week.

“The evidence that we have received since [the last meeting] on inflation is clear,” Lowe said Tuesday. “It was high. And higher than expected.”