ep 365 | What might OCR hikes mean for markets?
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On Point with Craig's Investment Partners.
The information provided here is general in nature and it's not financial advice. It doesn't take into account your financial situation, objectives, goals, or risk tolerance. All investments are subject to risk and none are guaranteed. So before you make any decisions, we recommend you contact an investment advisor. For more information about our services or to view the Craig's Investment Partners Financial Advice Provider Disclosure Statement, please visit our website, which is craigsip.com. Welcome to On Point. I'm Mark Lister, Investment Director at Craig's Investment Partners, and I'll be talking about a range of topics including economics, portfolio strategy, investor education, and anything else that's happening out there in financial markets.
G'day team, hope you're all well. Let's talk about the OCR today. When is it expected to rise? What will that mean for the economy, for markets and for investors? Well, the Reserve Bank meets at the end of this month, at the end of May, and there is an outside chance that the official cash rate, the OCR, will rise by 0.25% at that May meeting. If there's no move this month, and that's probably more likely, the focus will shift to the July meeting. And in July, markets see a 0.25% hike as almost certain. That would be the first increase to the OCR in three years, and it would have come much earlier than anyone expected before the Iran conflict started. After the OCR was reduced from its 15-year high of 5.5% to 2.25%, the next move was always going to be up.
The only area of debate was when, with most economists and market watchers picking very late this year or early in 2027. That would have been an OCR increase to celebrate, if there is such a thing. I say celebrate because it would have likely happened for the right reasons, namely an economic recovery on the back of falling unemployment, rising business profitability and higher activity. Interest rate rises that come against that sort of backdrop are usually taken in stride by investors and borrowers alike. However, a move this month or in July would be quite different. That would be in reaction to worries that high fuel prices will feed into stronger inflation elsewhere. While it's debatable whether things will play out that way, businesses are telling us that they intend to raise their prices, or at least try to, and households are saying they expect that as well.
That means behaviour is likely already starting to change, and that could force the hand of the Reserve Bank. What's missing here is that stronger economy that we would usually have when we're talking about the first OCR hike of a tightening cycle. We'd barely lifted ourselves out of recession when the conflict started earlier this year, so those green shoots that we saw at the end of 2025 and early in 2026, they have not yet had time to mature. That means we'll be facing higher interest rates at a time when activity is still stagnant, the labour market is still stuck in neutral, and house prices are potentially slipping again. All of that can cause consumers to put spending plans on ice, crimping demand for businesses at the precise time that they're seeing their costs increase.
That is bad for overall confidence, margins, and profitability, and it tends to be reflected in many local share prices. Since the OCR came into being in 1999, I've counted 209 monetary policy decisions. Most of these resulted in no change. That's about six or seven out of 10 on average. There have been 75 adjustments, and that's evenly split roughly between 35 cuts and 40 hikes over those 26 years. Now, the biggest cuts have been 1.5%. We've seen that twice, once in 2008 and again in 2009. So those were both during that period where the GFC took hold. The largest hike, the largest increase, was a 0.75% move, and that came in 2022. That's when the Reserve Bank had found itself playing catch-up to sharply rising inflation.
Now that period will be fresh in its memory, and it won't want to repeat that mistake, which is why it would rather move early and gradually instead of needing to do more later.
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