Australia’s Central Bank Raises Rates to Their Highest Level in 10 Years and Says that More Needs to Be Done

2022-05-03_Reserve-Bank-of-Australia
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On Tuesday, the Reserve Bank of Australia (RBA) increased interest rates to their highest level in ten years while maintaining its stance that further rate increases will be required to bring inflation under control. This stance was perceived as slightly hawkish by markets, which were looking for signs of a pause in monetary policy in the near future.

The Reserve Bank of Australia (RBA) completed its final policy meeting of the year by increasing its cash rate by 25 basis points to a new all-time high of 3.1%. This marked the eighth increase in as many months and brought the total number of rate increases to a significant 300 basis points since May.

The Reserve Bank of Australia (RBA) surprised all thirty economists surveyed by Reuters by deciding to raise interest rates by a small 25 basis points, marking its third increase in a row after a series of rises of half a point each.

Australia's central bank interest rates
Reuters Graphics

Governor Philip Lowe stated in a statement that was generally similar to those that were released over the last several months that the board anticipates raising interest rates even further in the time period ahead, but he noted that the board is not on a pre-set trajectory.

“The magnitude and timing of future interest rate increases will continue to be decided by the incoming data and the Board’s assessment of the outlook for inflation and the labour market,” said Lowe. “The data will continue to dictate the path of future interest rate increases.”

CBA head of Australian economics Gareth Aird, who had been predicting that rate hikes would pause after December, altered his forecast to add in another rise of 25 basis points in February, taking rates to a peak of 3.35%. This brings the total number of basis points that have been added to the total number of basis points that have already been added.

“As was to be anticipated, the Board has maintained its tightening inclination. But the Governor did not relax the critical language regarding forward guidance as much as we had expected,” Aird added.

The Federal Reserve will now have at least until February, when it will meet again to discuss policy after taking a vacation at the end of the year, to evaluate the results of its most aggressive monetary policy tightening cycle in decades.

According to the projections made by the central bank, the quarterly inflation report that is scheduled to be released in January is anticipated to reveal that consumer inflation ran at around 8% in the fourth quarter compared with a year earlier.

Following the publication of the policy decision, the local dollar continued its ascent, eventually reaching an intraday high of $0.6737.

The financial markets have factored in a greater likelihood of a rate increase in February and have increased their forecast for when interest rates will reach their highest point to around 3.6% by July 2019 from 3.5% before.

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