The Reserve Bank of Australia raises interest rates more than expected, signals further hikes

The Reserve Bank of Australia surprised markets by raising its main interest rate by 25 basis points to 0.35%, against wide expectations for 15 basis points hike, although many economists expected the RBA to stay on hold in May, due to election and expecting the wages data, both due later this month.

The central bank said it was the right time to start tightening its monetary policy, which was ultra-loose during the pandemic crisis, by withdrawing a massive monetary support, as inflation has accelerated, and the economy was near full employment.

The central bank’s action came after inflation peaked at 5.1% in the first quarter, the highest in two decades, after being stubbornly low in recent years, lifted mainly by surging prices of energy and a cost of living.

Core CPI, which excludes volatile items and is used as a gauge for underlying inflation, rose to 3.7%, jumping out of the central bank’s target band for the first time in twelve years and added to RBA’s decision for an action above expectations.

The RBA said it is committed to do what is necessary to ensure that inflation in Australia returns to target over time that will require a further lift of interest rates in coming months.

Market increased bets for another hike in June, to lift rate to 0.75%, with a following string of hikes to bring the interest rate to 2.5% by the end of this year and to 3.5% by the mid-2023, adding to hawkish outlook that reflects a global trend in tightening on soaring inflation, with the US Federal Reserve leading, on expectations for 150 basis points hike by the end of July.