RBA Hikes Rates After 11 Years

After over 11 years, the central bank decided today to lift the cash rate by 25 basis points to 35 basis points.

The RBA has also increased the interest rate on Exchange Settlement balances from zero to 25 basis points, even though forecasts were expecting a 15 bps hike, which caused an immediate reaction across both equity and currency markets.

Further to this, the ASX implied yield curve suggests rates to be above 3.0% by this time next year.

All but confirming this, Mr. Lowe warned that it is likely to make further cash rate hikes. He said:

“The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time. This will require a further lift in interest rates over the period ahead. The Board will continue to closely monitor the incoming information and evolving balance of risks as it determines the timing and extent of future interest rate increases.”

Mr. Lowe also revealed that there is evidence of wage growth picking up, which combined with very low interest rates, made it appropriate to start the process of normalising monetary conditions.

Although the Reserve Bank expects inflation to eventually fall back to target levels once supply chain issues are resolved, it does expect higher inflation to remain over the shorter term.

The central bank believes that some withdrawal of the extraordinary monetary support provided through the pandemic is appropriate. This will see the bank no longer reinvesting the proceeds of maturing government bonds.