Reserve Bank of Australia ups interest rates

Australia’s central bank lifted interest rates to a 12-year high on Tuesday, in response to persistent inflation.

The Reserve Bank of Australia increased the cost of borrowing by 25 basis points to 4.35%, the first increase in five months. The rise, the first under new governor Michele Bullock, was in line with forecasts.

The RBA said that while it felt inflation had now peaked this year, it remained “too high” and the return to its targeted 2% to 3% range was happening more slowly than expected.

It forecasts inflation to be around 3.5% by the end of 2024, and at the top of the target range by the end of 2025.

However, the bank hinted that November’s hike could be the last in this cycle. Previously forward guidance had stated that “some further tightening” may be required.

But Tuesday’s statement said: “Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable time frame will depend upon the data and the evolving assessment of risks.”

The Australian dollar fell in response, losing 0.8% at $0.6435.

TD Securities said: “The RBA delivered as expected, lifting the target cash rate 25bps. However, the surprise for the market was the dovish tweak to the forward guidance. Coupled with the lift in its inflation forecasts, the bank is arguably setting a higher hurdle for hikes.

“While we forecast no further RBA hikes in this cycle, we view either February or May 2024 as the next possible meetings to potentially draw the bank back to the hiking table.”

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said: “The RBA hike came as a sour reminder that there is no rule that says a bank can’t hike rates after pausing for four meetings.

“The Australian dollar fell after the decision, along with the Australian stock markets. [The] hike revived fears of economic slowdown more than appetite for higher Aussie yields, while a broad-based recovery in the US dollar and weak Chinese trade data certainly didn’t help.”