Don’t Sweat the Rate Hike Down Under

Are rate hikes bad for stocks? Whilst the ECB and Bank of England both held rates steady last week, the Reserve Bank of Australia (RBA) decided to end a string of cuts and hike last Tuesday.^[i] In the dog days of summer in the southern hemisphere, this supposedly shows the monetary policy institution tightening, raising questions once again amongst commentators we follow about what it all means for the economy and stocks. But as in Europe and America, we don’t think Australian rate hikes are the bull market killers many make them out to be. Monetary policy is worth watching to us, but we wouldn’t make too much of one hike.

On 3 February, the RBA announced it would raise the Cash Rate Target by 0.25 percentage point to 3.85%.^[ii] With Q4 inflation accelerating to 3.6% y/y from 2025’s 2.1% low in Q2, RBA Governor Michele Bullock said, “we cannot allow inflation to get away from us again,” aiming to bring it down into the bank’s 2% – 3% target range.^[iii] Whilst no one we know enjoys inflation, many still say hikes risk negative economic and market fallout. Especially Down Under: Because most Australian mortgage payments vary with the Cash Rate, the country is technically more sensitive to rate hikes than most nations.^[iv] So, many financial publications we read warn the first hike in two years will swiftly hit household budgets and quell spending and economic activity.

Time for investors to duck and cover? We don’t think so. Check the history. Between early May 2002 and March 2008, the RBA hiked interest rates by three full percentage points, from 4.25% to 7.25%.^[v] Aussie stocks rose 105% in Aussie dollars between the first and last hike.^[vi] The next tightening cycle, from October 2009 to November 2010, saw seven hikes in a little over a year.^[vii] Stocks rose 6.5%.^[viii]

Now, May 2022 – November 2023’s steep rate hike cycle began during a global bear market.^[ix] This was partially tied to monetary policy institutions’ surprising with rapid rate hikes, in our view, but they were just one of several sentiment headwinds that hit stocks then: Russia’s Ukraine invasion, global supply chain disruptions, surging inflation, recession alarms and more. Even so, from the RBA’s first hike to its last in that cycle, the MSCI Australia Index rose 4.2% in local currency.^[x] Then, with overnight rates staying elevated at 4.35% for over a year, Australian stocks gained even more.^[xi] From the first hike until the first cut, they returned 32.3% in Aussie dollars.^[xii]

This history highlights two points for us: First, hikes usually come during expansions, which prop up the profits stocks primarily tend to weigh; second, surprises move markets most and monetary moves rarely shock. We find 2022’s arguably had a bigger effect than most because monetary policymakers told investors globally they weren’t coming, adding a dose of surprise.^[xiii] But again, we think this was one of many factors driving a sentiment-driven, shallow bear market.

From there our research shows the surprises proved positive: Hikes had little discernible impact on Australian gross domestic product or household consumption.^[xiv] Business and personal lending grew throughout.^[xv] Reality turned out better than headlines we saw warned. Last week’s monetary shift was both expected and widely watched based on the news flow we witnessed—and came against a backdrop of a seemingly growing economy. Little looks shocking to us.

That doesn’t mean there are no risks. Monetary mistakes remain possible, especially considering the RBA’s reason for its rate hike, which we find misguided: low unemployment and faster job growth pressuring prices. These data are both backward-looking and factors that don’t drive future inflation, according to our analysis. Rather, inflation is always and everywhere a monetary phenomenon of too much money chasing too few goods and services.^[xvi]

With Aussie broad money supply running at tame pre-pandemic rates—half 2021’s surging monetary growth that led to 2022’s inflation spike—the logical basis for the RBA’s latest shift seems off to us.^[xvii] But we think it is premature to worry about overtightening today. We doubt a single hike amounts to that and considering future monetary shifts are unknowable now—and affect growth at a long lag—there is ample time for investors to assess them if and when they come, in our experience.