The Westpac (ASX: WBC) share price dropped sharply on Tuesday even after the Reserve Bank of Australia (RBA) decided to hike interest rate for the second straight month. The stock crashed by over 2% to A$23.41, which was almost 4% below its highest level this month. The bank’s market cap has retreated to A$81.96 billion.
RBA interest rate hike
The Reserve Bank of Australia caught most investors off-guard when it decided to make a higher rate than expected. The bank made a 0.50% rate hike and pushed its base lending rate to 0.85%. This means that the bank has hiked rates by 0.75% this year.
In his statement, Philip Lowe, the bank’s governor said that the bigger rate hike was necessary considering that inflation is expected to keep rising. It expects that inflation will move back to its 2-3% range in the coming year as oil and gas prices stabilizes. The statement added:
“The Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead. The size and timing of future interest rate increases will be guided by the incoming data.”
The Westpac share price declined sharply after the bigger rate hike for two main reasons. First, investors were still expecting that the RBA will hike interest rates in a bid to fight inflation.
Second, while higher rates lead to more interest income for banks, a potential recession will wipe out those gains. In addition, consumer spending will likely slow down as interest rates keep rising.
In its most recent results, Westpac said that its net profit declined by 5% to A$3.2 billion while its EPS fell by 12% to 85.4 cents as its costs fell by 10%. In its results, the management also focused on the company’s transformation. The CEO said:
“The next big step is exiting super and platforms and we are well progressed. To improve performance, we are digitising customer journeys, improving customer service, growing in our core markets and resetting the cost base.”
Westpac share price forecast
The daily chart shows that the Westpac share price has been in an ascending trend in the past few weeks. Along the way, the stock has formed an ascending channel pattern that is shown in black. It is now nearing the lower side of this channel.
The stock is also along the 25-day and 50-day moving averages while the MACD has made a bearish crossover. Therefore, there is a likelihood that the stock will keep falling as bears target the next key support level at A$22.5.
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