Reserve Bank of Australia hikes interest rates by 25 basis points

The Reserve Bank of Australia (RBA) hiked key interest rates by less than expected 25 basis points on Tuesday, attempting to strike a balance between combatting inflation and avoiding economic headwinds from a consistent rise in lending rates this year.

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The bank increased its cash target rate by 25 basis points (bps) to 2.6%, a nine-year high. It also increased the interest rate on Exchange Settlement balances by 25 basis points to 2.50%. Analysts predicted a rate increase of at least 50 basis points.

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The Australian dollar responded unfavourably to the decision, extending its losses to $0.6468, down 0.8%. The currency, like most of its foreign rivals, is under pressure from increasing US interest rates, which have pushed up the value of the greenback.

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Despite the smaller-than-expected increase, the RBA stated that it intends to continue hiking interest rates this year, citing inflation that is far above its target range.

RBA Governor Philip Lowe stated in a statement that inflation is projected to climb in the coming months and conclude the year at around 7.75%.

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“Medium-term inflation expectations remain well anchored, and it is important that this remains the case,” Lowe said. 

“The Board’s priority is to return inflation to the 2–3% range over time. It is seeking to do this while keeping the economy on an even keel. The path to achieving this balance is a narrow one and it is clouded in uncertainty,” he added.

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Lowe voiced concern about the impact of rising inflation and interest rates on household consumption and consumer confidence, despite the fact that expenditure has remained buoyant due to a tight labour market.

In Australia, headline inflation climbed 6.1% year on year in the June quarter, the fastest rate in more than two decades. The amount is much higher than the RBA’s yearly inflation target range of 2% to 3%, and it is projected to remain high for the rest of the year.

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As a result of global commodities market disruptions, the country is grappling with rising food and fuel imports. The labour market’s strength has also kept spending stable, raising inflation.