The Reserve Bank of Australia (RBA) has unexpectedly raised its key interest rate by 25 basis points to 3.85%, defying market expectations of a pause. The decision, taken at the bank's monthly meeting on Tuesday, marks the 11th increase since last May, bringing the cumulative tightening to 3.75 percentage points.
RBA Governor Philip Lowe said inflation, while past its peak at 7%, remains too high. '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,' he stated. The central bank also signalled that further tightening may be required, depending on economic developments.
Treasurer Jim Chalmers acknowledged the decision would be 'a really difficult decision for a lot of Australians who are already under the pump'. He emphasised that the upcoming budget would prioritise 'responsible cost of living relief' that does not add to inflation.
The rate rise came despite weaker-than-expected inflation data last week. The RBA board weighed other factors, including a near-half-century low unemployment rate, a projected population increase of 700,000 over the next two years, and a rebound in property prices.
In response, the Australian dollar surged about three-quarters of a US cent to above 67 US cents, while stocks fell approximately 1.2%. Among major banks, only Commonwealth Bank correctly predicted the move, while ANZ, Westpac, and NAB had expected a hold or a cut.
The RBA now forecasts GDP growth of 1.25% in 2023, down from its February estimate of 1.5%, and expects per capita output to be negative given population growth. The central bank will release its updated quarterly statement on monetary policy on Friday.
