Australia’s Central Bank Raises Rates to 12-Year High, Eases Hawkish Stance – Reuters

By Wayne Cole

SYDNEY (Reuters) – Australia’s central bank raised interest rates to a 12-year high on Tuesday, marking the end of four months of steady policy. The Reserve Bank of Australia (RBA) increased its cash rate by 25 basis points to 4.35%, citing concerns that inflation could remain elevated for an extended period.

In concluding its November policy meeting, RBA Governor Michele Bullock stated that the necessity for further tightening would depend on incoming data and an evolving risk assessment regarding inflation’s trajectory.

This decision was a departure from the October statement, which indicated that additional tightening might be necessary. Markets interpreted the latest move as a potential signal that this could be the final increase of the current cycle.

Consequently, the local dollar fell 0.8% to $0.6435, and bond futures saw an uptick as investors adjusted their expectations regarding a potential rate rise in December. Rob Thompson, a rates strategist at RBC Capital Markets, characterized the move as "a dovish hike," suggesting that it did not indicate an immediate need for further increases.

Following warnings from policymakers regarding inflation, which surprised to the upside in the third quarter, the market had anticipated this week’s rate adjustment.

INFLATION REMAINS PERSISTENT

This rate change marks Bullock’s initial action since assuming the role of governor in September and serves to bolster her credentials in tackling inflation.

Economic growth has already decelerated to a two-year low of 2.1%, with projections indicating it could drop to around 1% in 2024 as the repercussions of higher rates take effect.

Since May last year, rates have surged by 425 basis points, significantly raising average mortgage repayments in one of the most aggressive rate cycles recorded for the RBA.

The possibility of a hike arose after consumer price inflation exceeded forecasts in the third quarter, rising to 5.4% and far exceeding the RBA’s long-term target range of 2-3%. Bullock noted that the central bank’s forecasts for consumer price inflation had been revised upward to 3.5% by the end of 2024, while inflation is expected to reach the upper limit of the target band only by the end of 2025.

This increase places the RBA in a unique position as one of the few central banks in the developed world still pursuing rate hikes, while markets believe rates in the United States, Canada, and Europe have peaked.

The RBA Board had previously shown readiness to tolerate a slightly slower reduction in inflation in order to maintain full employment—an achievement that has not been realized since the 1950s. However, their patience waned as inflation proved more persistent than anticipated within the service sector, while housing prices surged to record levels and unemployment remained low at 3.6%.