Australia’s central bank raises interest rates by 25 basis points, defying expectations
- Reserve Bank of Australia Governor Philip Lowe said that while inflation in the country may have “passed the peak”, there are still indicators that show inflation is persisting.
- The central bank’s target for inflation is an area between 2% and 3%.
Lampposts in front of the Reserve Bank of Australia (RBA) building in Sydney, Australia, Monday, February 6, 2023.
Bloomberg | Bloomberg | Getty Images
The Reserve Bank of Australia again defied market expectations on Tuesday, raising the benchmark interest rate by 25 basis points to 4.1%.
Economists polled by Reuters widely expected the central bank to keep interest rates steady. Consequently, Australian shares fell further on the news, with the S&P/ASX 200 last trading 1% lower. The Australian dollar rose 0.73% to 0.6667 against the US dollar shortly after the decision, with the central bank struggling with the latest inflation rate of 6.8% for the month of April.
Reserve Bank of Australia Governor Philip Lowe said that while inflation in the country may have “passed the peak”, there are still indicators that show inflation is persisting.
“Recent data indicate that upside risks to the inflation outlook have increased and the board has responded to this,” Lowe said in Tuesday’s statement.
“This further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable timeframe,” Lowe added.
The central bank’s target for inflation is an area between 2% and 3%.
“If high inflation were to become entrenched in people’s expectations, it would be very expensive to reduce later, with even higher interest rates and a greater increase in unemployment,” Lowe said.
The governor’s statement added that there may be further rate hikes required to bring down the country’s inflation rate, adding that it will “depend on how the economy and inflation develop.”
“Some further tightening of monetary policy may be necessary to ensure that inflation returns to target within a reasonable time frame… The Governing Council will continue to closely monitor developments in the global economy, trends in household consumption, and the outlook for inflation and the labor market ,” Lowe said.
The central bank also highlighted the daunting task of averting a recession in the Australian economy.
It said in the statement: “The board continues to seek to keep the economy on a steady keel as inflation returns to the 2-3 percent target range, but the path to achieving a soft landing remains narrow.”
HSBC’s Paul Bloxham added that the RBA’s aim of achieving a soft landing, or ending the hike cycle without driving the economy into recession, was becoming increasingly difficult.
“I think this makes the narrow road that the RBA governor has referred to … the narrow road is getting narrower and narrower as we speak,” he told CNBC’s “Capital Connection” on Tuesday.
Tuesday’s decision may indeed indicate that a hard landing is a risk the central bank is willing to take to tame elevated inflation levels.
“I think it’s getting harder and harder to believe that Australia isn’t going to have more of a slowdown to bring down inflation, but the RBA has clearly decided today that that’s the risk they’re prepared to take,” Bloxham said.
