February 8, 2023

In a more hawkish policy stance than many had anticipated, the Australian central bank increased its cash rate by 25 basis points to a decade-high of 3.35% on Tuesday and underlined that more hikes would be necessary.

The Reserve Bank of Australia (RBA) ended its February policy meeting by dropping earlier assurances that it was not on a predetermined path and predicting inflation would only return to the top of its target range of 2-3% by mid-2025.

Governor Philip Lowe stated in a statement that “the Board expects that further increases in interest rates will be necessary over the months ahead to guarantee that inflation returns to target and that this period of elevated inflation is really transitory.”

Markets were taken aback by the RBA’s hawkish tone, which dashed hopes for a quick break in the tightening campaign. In contrast to the 3.75% rate before the decision, the futures market has priced in a top rate of 3.9%, which indicates at least two additional rate hikes in March and April.

The local currency surged to $0.6940, adding to earlier advances. Government bond yields for three years and ten years both increased by 15 basis points to 3.254% and 3.615%, respectively.

Given that recent inflation statistics surprised on the high side, markets had anticipated a quarter-point change, while there was some chance of a larger increase. Since May of last year, there have been nine rate increases, raising rates by a total of 325 basis points.

Core inflation, according to Lowe, was more than anticipated; the trimmed mean gauge increased to 6.9% from a year ago last quarter, exceeding the central bank’s previous prediction of 6.5%.

Source: CNN
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