Reserve Bank of Australia raises interest rates to the highest in a decade

The Reserve Bank of Australia raised interest rates by 25 basis points to 3.1%, in its December policy meeting, pushing rates to the highest in ten years.

The central bank continued with tightening and raised interest for the eighth straight time since May, making a total increase of rates by a 300 basis points, with wide expectations for another 25 basis points hike, shifting previous expectations for a pause in tightening phase, which comprised on a series of 0.5% hikes and two rate increases by 0.25%.

The RBA said it expects to continue raising interest rates over the period ahead, in continuous fight with high inflation which is expected to reach 8% in the fourth quarter but highlighted that timing and size of future actions will depend on incoming economic data, RBA Board’s assessment of the outlook for inflation and the situation in the labor market.

Economists expect the central bank to raise interest rates again by 25 basis points in the next meeting in February, to bring the borrowing cost to 3.35% and forecast that rates will peak at 3.6% in July vs initial estimation at 3.5%.

It is very likely that the Australia’s central bank would follow the action of the US Federal Reserve which signaled a pause after strong tightening phase, in order to assess the impact of recent strong rate hikes on inflation, as well as on economic growth.

Deterioration in economic conditions and consumer spending would be a trigger, as recent strong rate hikes have already started to cool the economy.