Australia central bank stuns market with 25-bps hike, says more might be needed

SYDNEY  -Australia’s central bank on Tuesday stunned markets by raising its cash rate 25 basis points when traders had looked for an extended pause, saying inflation was way too high and warned that further hikes might be needed to bring it to heel.

Wrapping up its May policy meeting, the Reserve Bank of Australia (RBA) lifted rates to 3.85 percent and said “some further” tightening may be required to ensure that inflation returns to target in a reasonable timeframe.

Markets had been wagering heavily on a steady outcome given core inflation had eased a little more than expected and the full pain of the RBA’s past tightening was yet to be felt in the economy.

Investors reacted by pushing the Australian dollar 0.9 percent higher to $0.6687, while three-year bond futures slumped 16 ticks to 96.85.

“Inflation in Australia has passed its peak, but at 7 percent is still too high and it will be some time yet before it is back in the target range,” said governor Philip Lowe.

“Given the importance of returning inflation to target within a reasonable timeframe, the Board judged that a further increase in interest rates was warranted today.”

Domestically, the much-watched first quarter consumer prices data last week confirmed that inflation was easing from 33-year highs, but it was only projected to return to 3 percent – the top of RBA’s target band of 2-3 percent – in mid-2025.

There are signs of inflation moderating in food, although it remained “frustratingly elevated” in many areas, Chief Executive Officer Brad Banducci said in an earnings call on Tuesday.

A surge in migration, which could lift population growth to a heady 2 percent this year, is fueling  increases in rents and adding to inflationary pressures in the short-term, although that would also expand labor supply.

Labor market remained tight, with net employment blowing past expectations in March and the jobless rate hovering at near 50-year lows, a result that would please policymakers who are keen to preserve the strong job gains amid the most aggressive tightening campaign in modern history.

Home prices are also showing signs of bottoming out, having risen for the second straight month in April, supported by rising migration levels and a chronic shortage in housing supply.

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