SYDNEY (Reuters) – Australia’s central bank on Tuesday raised interest rates by a quarter-point to an 11-year high, and warned that further tightening may be required to ensure that inflation returns to target.
Wrapping up its June policy meeting, the Reserve Bank of Australia (RBA) hiked the cash rate to 4.1%, saying inflation is still too high and that it wanted to prevent high price expectations from becoming entrenched.
Markets had been leaning towards a pause, although they had priced in a sizeable 40% chance that the RBA would hike by 25 basis points. Many economists had seen the June meeting outcome as a line-ball call. [AU/INT]
The Australian dollar surged 0.8% to $0.6667, the highest in 2-1/2 weeks after the policy statement, while three-year bond futures dived 8 ticks to 94.345.
“Inflation in Australia has passed its peak, but at 7 per cent is still too high and it will be some time yet before it is back in the target range,” said RBA Governor Philip Lowe in a statement.
“This further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable timeframe.”
The RBA has increased interest rates by a whopping 400 basis points since May last year, the most aggressive tightening cycle in its modern history. It had surprised markets by hiking again in May after pausing for just a month to assess its earlier tightening.
Global policymakers are grappling with still-high inflation despite sharp increases in borrowing costs over the past 12-18 months, with some already pausing and others set to do so as their economies teeter on the brink of recessions.
The Bank of Canada on Wednesday would debate its monetary policy decision after four rate pauses, and the Federal Reserve is expected to end a run of 10 straight rate increases next week while leaving the door open to a future rise in borrowing costs.
(Reporting by Stella Qiu; Editing by Shri Navaratnam)
