(Updated with details, graphs)
SYDNEY, June 6 (Reuters) – The central bank of Australia (RBA) on Tuesday raised its key interest rate by a quarter point to 4.1%, an 11-year high, warning that further hikes may be needed to ensure inflation returns to its target.
Financial markets were tilting in favor of a pause, even though they had factored in a sizable 40% chance of the RBA raising its rate by 25 basis points.
“Inflation in Australia has passed its peak. But at 7% it is still too high and it will still take time before it returns to the target range,” central bank governor Philip Lowe said in a statement.
“This further rate hike is intended to bolster confidence that inflation will return to target within a reasonable time frame,” he added.
On the foreign exchange market, the Australian dollar (+1%) climbed to its highest level in three weeks against the US dollar after the announcement of the RBA’s decision.
The latter has raised its key rate by 400 basis points since May 2022, carrying out the fastest monetary tightening in its modern history.
Given the weak outlook for productivity, unit labor costs and lingering services inflation, Adam Boyton, head of economics at ANZ, expects the RBA to hike its rate another quarter point in August.
“The Bank could well go beyond that. The risks point to the need for the RBA to act more than once,” he said.
The central bank currently expects inflation – which stood at 7% in the first quarter – to return to the upper end of its target range of 2%-3% by mid-2025, a slower trend than many other economies, as Philip Lowe wants to protect important gains in the labor market.
The economy started to show signs of faltering but inflation in April surprised on the upside and a large wage increase led many economists to expect higher rates for longer.
Philip Lowe acknowledged the risks of a deeper downturn in the economy, saying the path to “achieving a soft landing remains narrow”.
The evolution of GDP in the first quarter will be published on Wednesday and the Reuters consensus expects growth of 0.3% compared to the last months of 2022, during which the economy grew by 0.5%.
(Stella Qiu, French version Laetitia Volga, edited by Tangi Salaün)