Australia’s central bank raised its benchmark rate by a quarter-point to a 12-year high, ending a four-session long pause, as inflation is likely to be more persistent than estimated though policymakers suggested that any further tightening is off the table.
The policy board of the Reserve Bank of Australia, headed by Governor Michele Bullock, decided to lift the cash rate target by 25 basis points to 4.35 percent.
The RBA also increased the interest rate paid on exchange settlement balances by 25 basis points to 4.25 percent.
The central bank had held interest rates steady since June following an increase of 4 percentage points since May last year. The current 4.35 percent is the highest since late 2011.
The latest raise was the first change since Bullock took office as governor in September. “The Board judged an increase in interest rates was warranted today to be more assured that inflation would return to target in a reasonable timeframe,” Bullock said.
Although inflation has passed its peak, it is still too high and is proving more persistent than expected a few months ago, the bank noted.
Information available since the August meeting suggested that the risk of inflation remaining higher for longer has increased, the bank said.
Inflation is forecast to be around 3.5 percent by the end of 2024 and at the top of the target range of 2-3 percent by the end of 2025.
The labor market conditions eased but they remain tight and housing prices continued to increase across the country. These factors added to the risks to inflation remaining higher for longer.
The RBA today downgraded its unemployment rate forecast saying the rate will rise gradually to around 4.25 percent.
The bank said there remains a high level of uncertainty around the outlook for the Chinese economy and the implications of the conflicts abroad.
The bank said that future action will depend upon the data and the evolving assessment of risks.
Capital Economics economist Abhijit Surya said the latest hike will be the last in the RBA’s current tightening cycle.
The Australian economic activity as well as private consumption will slump more sharply in the year ahead than most anticipate, said Surya.
The economist expects RBA to pivot to policy loosening as early as the second quarter of 2024.