Australia Central Bank shocks market with a hike to 3.85%

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RBA's governor says inflation has passed peak but at 7% is 'still too high

Australia's central bank on Tuesday stunned markets by raising its cash rate 25 basis points (0.25%) when traders had looked for an extended pause, saying inflation was way too high and warned that even further tightening may be needed to bring it to heel.

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

The Australian dollar shot up by 1% to $0.6695, while three-year futures dived 23 ticks to 96.780, the sharpest daily drop since mid-2012.

Inflation is now expected to slow to 4.5% this year, compared with the previous forecast of 4.75%.

Also on Tuesday, the RBA lowered the economic growth forecast for this year to 1.25%, compared with 1.5% previously, while projecting the unemployment rate to increase to around 4.5% in mid-2025.

Published on 10 May 2023

by Michael S.