The Australian dollar rose sharply after the Reserve Bank of Australia unexpectedly raised the cash rate by 25-basis point to 4.1% today after delivering it by the same margin in May.
Today’s rate hike marks the eleventh time the bank has lifted rates in the past year, defying market predictions for a pause and pushing borrowing costs to their highest level since April 2012.
The board also increased the interest rate on Exchange Settlement balances by 25-basis point to 4.0%. Notably the rate was at 3.85% prior to today’s interest rate hike.
After the decision, the Australian dollar rallied against the US dollar, and the New Zealand dollar. The AUDUSD pair is now on track for its third straight day of gains and is currently looking to test the 0.6700 level.
Looking at the details of the statement, the RBA continues to keep the focus on inflation pressures and made no change whatsoever to the final paragraph with regards to forward guidance.
The RBA statement made it clear that the central bank is not happy with the current state of inflation in the country as it noted that “Inflation has passed its peak but is still too high.”
And the central bank hinted at more rate hikes as it said that “It will be some time yet before it is back in the target range.” And “RBA remains alert to the risk that expectations of ongoing high inflation contribute to larger increases in both prices and wages.”
On the economy they added that “Economic growth has slowed, and labour market conditions have eased, although they remain very tight” and “Wages growth has picked up in response to the tight labour market and high inflation.”
Finally, they said that “The path to achieving a soft landing remains a narrow one” and “A significant source of uncertainty continues to be the outlook for household consumption.”
