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Australia’s central bank raised rates by 25 basis points, beating expectations

  • While Reserve Bank of Australia Governor Philip Lowe said inflation in the country “may be past its peak”, there are indicators that inflation is still continuing.
  • The central bank’s target for inflation is 2% to 3%.

Lampposts in front of the Reserve Bank of Australia (RBA) building in Sydney, Australia, Monday, February 6, 2023.

Bloomberg | Bloomberg | Good pictures

The Reserve Bank of Australia again beat market expectations on Tuesday, raising its benchmark rate by 25 basis points to 4.1%.

Economists in a Reuters poll widely expected the central bank to keep rates steady. As a result, Australian shares fell further, 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, as the central bank grapples with the latest inflation rate. 6.8% in April.

While Reserve Bank of Australia Governor Philip Lowe said inflation in the country “may be past its peak”, there are indicators that inflation is still continuing.

“Recent data indicate that downside risks to the inflation outlook have increased and the Board has responded to this,” Lowe said in a statement on Tuesday.

“Further increases in these interest rates should provide greater confidence that inflation will return to target within a reasonable timeframe,” Lowe added.

The central bank’s target for inflation is 2% to 3%.

“If high inflation takes hold in people’s expectations, then lowering it will be very expensive, including higher interest rates and rising unemployment,” Lowe said.

The governor’s statement said further rate hikes may be needed to bring down the country’s inflation rate, “depending on how the economy and inflation develop.”

“Some further tightening of monetary policy may be needed to ensure that inflation returns to target in a reasonable timeframe… The Board will continue to focus on developments in the global economy, trends in household spending and the outlook for inflation and the labor market,” Lowe said.

The central bank also highlighted the difficult task of avoiding a recession in the Australian economy.

It said in the statement: “The Board is still trying to keep the economy balanced as inflation returns to the 2-3 percent target range, but the path to achieving a soft landing remains narrow.”

HSBC’s Paul Bloxham said the RBA’s aim to achieve a soft landing, or end its hiking cycle without pushing the economy into recession, was becoming increasingly difficult.

“I think this creates the narrow path that the RBA governor is referring to … and that narrow path is getting narrower and narrower as we speak,” he said on CNBC’s “Capital Connection” on Tuesday.

Indeed, Tuesday’s decision may indicate that a hard landing is a risk the central bank is willing to rein in higher inflation levels.

“I think it’s harder and harder to believe that Australia isn’t going to have more of a recession to reduce inflation, but the RBA has clearly decided today that’s a risk they’re willing to take,” Bloxham said.

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