Australian stocks slide after RBA hikes rates, issues economic warning

Investing.com -- Australian stocks fell sharply on Tuesday after the Reserve Bank unexpectedly raised interest rates and flagged more potential hikes as inflation continues to run hot in the country, while also warning that economic growth is set to slow. 

The benchmark ASX 200 index fell 1% after the RBA raised rates by 25 basis points to 3.85%, ducking market expectations that it will maintain rates at 3.60% after pausing in April. 

Australia’s big four banks - Commonwealth Bank Of Australia (ASX:CBA), Westpac Banking Corp (ASX:WBC), ANZ Group Holdings Ltd (ASX:ANZ), and National Australia Bank Ltd (ASX:NAB) fell between 0.4% and 0.8%, and were among the biggest weights on the ASX.

While local banks typically see higher net interest margins from passing on interest rate hikes to their customers, Australia’s biggest banks have warned of a credit slowdown due to increased borrowing costs, particularly on mortgages. 

Heavyweight miners BHP Group Ltd (ASX:BHP) and Rio Tinto Ltd (ASX:RIO) lost about 1.4% each, coming under pressure from a 1.2% spike in the Australian dollar, which rallied after the RBA decision. A stronger dollar weighs on the margins earned from commodity exports by regional miners. 

Oil and gas firm Woodside Energy Ltd (ASX:WDS) fell 1.4%, also pressured by a stronger dollar. 

Sentiment towards Australian stocks was hit by the RBA forecasting below-average growth in the coming years, as high interest rates weigh and as a post-COVID economic rebound runs out of steam. 

Inflation is also expected to come within the RBA’s target range only by mid-2025, with economic growth running under average in the interim. The bank forecast a 2023 GDP of 1.25%, well below the 2.7% growth seen in 2022. 

Concerns over the RBA largely offset some positive cues from Australian firms. Supermarket chain Woolworths Ltd (ASX:WOW) logged a bigger-than-expected jump in quarterly sales, although this largely came from sales of its cheaper household products, amid high inflation.

Woolworth shares fell 1.4%. 

The Australian economy is also set for increased headwinds from a sluggish recovery in China, the country’s largest trading partner. Recent data showed that a post-COVID economic rebound is running out of steam, with the Chinese manufacturing sector unexpectedly contracting in April.