The Key Rate in Australia Was Raised to a 10-Year High, With More to Come

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Australia’s central bank has raised interest rates by a quarter-percentage point to a 10-year high as inflation remains stubbornly high. The move sent the Australian dollar and bond yields higher, as the Reserve Bank of Australia (RBA) signalled further tightening would be needed to bring down inflation.

“The RBA just seems to be removing the conditionality from forward guidance about more hikes,” said Tim Baker, head of macro research at Deutsche Bank AG. “So probably a case of dispensing with the pause narrative.”

Australia Reserve Bank

In a widely anticipated move on Tuesday, the Reserve Bank of Australia raised its cash rate to 3.35%, the highest since September 2012. This sent the Australian currency to an intra-day high of 69.51 US cents before paring some gains as investors digested the news. While three-year bond yields jumped 18 basis points to 3.28%, stocks fell 0.5%.

Governor Philip Lowe, in past communications, has talked about drawing out the tightening cycle to keep the RBA’s battle to contain inflation front and centre for households. His decision this week is likely part of that strategy, as higher borrowing costs help drive down consumer prices.

In today’s statement, he indicated that there might be more rate hikes ahead as the central bank attempts to curb stubbornly high inflation. In his remarks, Lowe suggested that inflation may take until mid-2025 to return to the top of the RBA’s 2-3% target range.

The RBA is also likely watching closely how businesses react as rising rates pressure profit margins and business investment decisions become more difficult. This is due to increased cost pressures from higher interest charges on borrowings and reduced returns on investment opportunities available across various sectors of the economy. 

Higher borrowing costs will also weigh heavily on government finances, given that they are significant lenders in the economic sector.

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