Australia’s central bank raised its key interest rate by half a percentage point on Tuesday, which was the biggest hike since 2000, and vowed to withdraw the monetary support to bring inflation back to the target.
The policy board of the Reserve Bank of Australia, headed by Governor Philip Lowe, decided to lift the cash rate target by a bigger-than-expected 50 basis points to 0.85 percent from 0.35 percent.
This was the second consecutive rate hike after lifting a quarter-point in May. Markets had expected another moderate quarter-point increase this time. A 50 basis point increase was the biggest since February 2000.
The interest rate on Exchange Settlement balances was also lifted by 50 basis points to 75 basis points.
The central bank expects inflation to increase further, but then decline back towards the 2-3 percent range next year. Today’s increase in interest rates will assist with the return of inflation to target over time, Lowe said.
The latest action is a further step in the withdrawal of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic. Lowe said the resilience of the economy and the higher inflation mean that this extraordinary support is no longer needed.
The Board expects to take further steps in the process of normalizing monetary conditions in Australia over the months ahead, the governor said. The size and timing of future interest rate increases will be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labor market.
With the second quarter inflation data due by end-July, the bank is likely to hike the rate by another 50 basis points in both July and August and perhaps even longer, Marcel Thieliant, an economist at Capital Economics, said.
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