On Tuesday, Australia’s central bank shocked markets by hiking its cash rate by 25 basis points, saying inflation was too high and that future rises may be needed.
The Reserve Bank of Australia (RBA) raised rates to 3.85% at its May policy meeting and stated “some further” tightening may be needed to bring inflation to goal in a reasonable period.
Since core inflation had eased more than expected and the economy hadn’t fully felt the RBA’s past tightening, markets had been betting on a steady outcome.
Investors drove the Australian dollar 0.9% higher to $0.6687 and three-year bond futures 16 ticks lower to 96.85.
“Inflation in Australia has passed its peak, but at 7 percent is still too high, and it will be some time before it is back in the target range,” said Governor Philip Lowe.
“Given the importance of returning inflation to target within a reasonable timeframe, the Board judged that a further increase in interest rates was warranted today.”
Last week, the much-watched first quarter consumer prices data showed that inflation was declining from 33-year highs, but it was only predicted to recover to 3%, the top of the RBA’s target band of 2-3%, in mid-2025.
In an earnings call on Tuesday, Woolworths(WOW.AX) CEO Brad Banducci said food inflation was moderating but remained “frustratingly elevated” in many areas.
Migration, which might boost population growth to 2.0% this year, is driving rent rises and short-term inflation, but it will also improve labor supply.
In March, net employment exceeded forecasts, and the unemployment rate stayed around 50-year lows, pleasing policymakers who want to maintain solid job growth during history’s most aggressive tightening campaign.
In April, home prices rose again, driven by growing migration and a persistent housing supply constraint.
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