RBA Raises Rate and Signals More to Come, Sending Aussie Higher By

(Bloomberg) — Australia’s central bank increased interest-rates by more than economists had anticipated and signaled further hikes to come, reflecting a greater urgency to rein in surging inflation.

The Reserve Bank raised its cash rate by 25 basis points to 0.35%, citing accelerating consumer prices in a statement announcing Tuesday’s decision. It was the first time borrowing costs had been lifted in the middle of an election campaign in almost 15 years.

“The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time,” Governor Philip Lowe said in a post-meeting statement. “This will require a further lift in interest rates over the period ahead.”

Australian three-year yields jumped as much as 16 basis points to 2.98%, the highest since April 2014, after the decision. Ten-year yields held at 3.30% after the announcement. The Australian dollar rose as much as 1.4% to 71.48 U.S. cents.

In opting for a bigger-than-expected increase, Australian policy makers are following global counterparts in taking a more aggressive approach to combating inflation. The Reserve Bank of New Zealand and the Bank of Canada last month hiked by 50 basis points and the Federal Reserve is widely expected to follow suit this week.

The RBA’s hike is a blow to the center-right government, already trailing in opinion polls, as it campaigns for a rare fourth term in office at a May 21 election. The central bank’s decision is set to push up mortgage repayments for heavily indebted households at a time when they’re grappling with rising cost of living pressures amid still tepid wages growth.

Read more: Powell Takes Lead in Round of Interest-Rate Hikes Worldwide

Also on the agenda Tuesday was the central bank’s plan for future bond maturities after it tripled its balance sheet to about A$650 billion to support the economy through the coronavirus pandemic. 

The central bank decided against reinvesting the proceeds of bonds that mature in coming months, in effect embarking on a gradual quantitative tightening. The impact of the widely expected decision is likely to be minor over the next year as only a small number of bonds are due to mature.

Lowe will hold a press conference at 4:00 p.m. Sydney time.

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