Australia’s Central Bank Has Indicated More Rate Hikes May Be on the Horizon After Taking Rates to a Decade-High

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The Reserve Bank of Australia’s latest cash rate decision had a more hawkish stance than anticipated. 

It raised the interest rate to 3.35 per cent, its highest level in ten years, and expressed that further hikes would be necessary.

Following the completion of their February meeting, the Reserve Bank of Australia (RBA) abandoned its previous guidance on a pre-set path and predicted inflation would reach its target range of 2-3 per cent by mid-2025.

The Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary,” governor Philip Lowe said in a statement.

Markets were shocked by the surprising hawkish tone of the RBA, which eliminated hopes for a pause to the tightening campaign.

Future markets have priced at a peak rate of 3.9 per cent, implying two more rate hikes should be expected in March and April, compared with its original estimated 3.75 per cent.

The local dollar rose to a new high of $0.6940, demonstrating the strength of earlier gains. In addition, three-year government bond yields spiked 15 bps to 3.254 per cent, while ten-year yields increased an impressive 15 bps to 3.615 per cent.

The surprise was not in the decision, but rather the shift in tone and forward guidance in the Governor’s Statement,” said Gareth Aird, head of Australian economics at CBA.

After the decision, he revised his call for rates to a maximum of 3.85 per cent, an increase from the initial rate of 3.35 per cent.

The RBA Board has decided to lift the cash rate in the coming months if economic data aligns with their revised estimates.

Analysts had predicted a 25-basis point rise, the potential for an increase higher than that existed due to recently released inflation figures. This ninth hike since May 2020 has resulted in a total rate rise of 325 basis points.

Lowe noted that core inflation had unexpectedly risen, as the trimmed mean indicator surged to 6.9 per cent during the last quarter compared to a year ago- surpassing the central bank’s forecast of 6.5 per cent.

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