An expected yet unwelcome interest rate decision from the Reserve Bank sent a fresh wave of pressure through Australian shares on Tuesday, dragging the market to a three-week low.
The S & P/ASX 200 fell 16.6 points, or 0.19 per cent, to 8,680.50, a fresh 20-day low, marking the market’s tenth fall in the past 11 sessions.
The broader All Ordinaries also finished lower, while the Australian dollar strengthened to about $US0.71.
Capricorn Metals led gains, surging 10.76 per cent, while WiseTech Global also finished stronger, up 5.17 per cent.
On the downside, Codan was the worst performer, tumbling 8.93 per cent, followed by Magellan Financial Group, down 6.77 per cent.
The Reserve Bank lifted the official cash rate by 25 basis points to 4.35 per cent following a two-day meeting, the third increase this year, and signalled it remains ready to act again if inflation stays elevated.
IG market analyst Tony Sycamore said the tone of the decision weighed on sentiment throughout the session, adding the hike had effectively unwound last year’s easing and markets are now bracing for further tightening.
“This is the third rate hike this year … you would kind of feel there is another hike coming throughout the year at this point in time,” Mr Sycamore said.
“The next rate hike is priced for September … whether they squeeze another one in November or December remains to be seen.”
He added the RBA’s eight-to-one vote reinforced the central bank’s determination to tackle inflation.
“The tone was noticeably more hawkish on the inflation outlook there so they’re pretty determined to control that,” he said.
Seven of 11 sectors finished higher, but losses in rate-sensitive sectors ultimately dragged the market into the red.
Energy stocks led gains as crude oil held above $US100 a barrel, while financials and consumer-facing sectors struggled following the rate decision.
“It’s been another soft session for the ASX 200 … it has found some support sitting down there above 8600,” Mr Sycamore said.
He said the sectors that didn’t perform particularly well today were “the ones you would expect to struggle”, such as financials and consumer discretionary stocks.
The big four banks were mixed but mostly weaker, reflecting concerns higher rates will hit borrowing demand and economic growth. Commonwealth Bank edged 0.15 per cent higher, while Westpac fell 1.95 per cent, NAB dropped 0.74 per cent and ANZ slipped 1.03 per cent.
Mr Sycamore said weak outlooks from lenders are becoming a key headwind.
“It’s very hard to see the ASX 200 marching back higher while the banks are struggling and that probably is going to be a bit of an Achilles heel for us,” he said.
Mr Sycamore said the biggest risk if rates remain high for longer is for sectors most exposed to borrowing costs.
“The financials and the consumer discretionary are two of them. And then you’ve probably got the real estate sector there, the three which are so interest rate sensitive out there,” he said.
“The more that interest rates go up, the less appetite there is for credit. And that’s a big thing that will start to weigh.”
He said household spending has held up so far but warned that may not last.
“At this point in time we’ve weathered those 50 basis points of hikes pretty well but whether today’s one is sort of the nail in the coffin there … consumer confidence has died out, business confidence has been pretty poor.”
He said household spending is likely to come under pressure in the months ahead as rising energy costs, cost-of-living pressures and higher interest rates begin to weigh on consumers.
Despite the modest decline, Mr Sycamore said the shift in rate expectations could give markets some short-term breathing room, with September now looking like the next potential rate hike.
