RBA unexpectedly hikes rates by 25 bps, says inflation still too high

The Reserve Bank of Australia unexpectedly hiked interest rates on Tuesday and said that more monetary policy tightening may still be in order as the bank moves to curb stubborn inflation in the country.

The RBA hiked its cash target rate by 25 basis points to 3.85%, ducking market expectations that it would keep the rate at 3.6% after pausing in April.

The Australian dollar rallied 0.9% after the decision, given that higher interest rates make the currency appear more attractive.

The move comes as recent data showed that Australian inflation eased slightly less than expected in the first quarter of 2023, at 7%. While inflation fell from an over 30-year high hit in December, it still remained well above the RBA’s 2% to 3% target range.

“While the recent data showed a welcome decline in inflation, the central forecast remains that it takes a couple of years before inflation returns to the top of the target range,” RBA Governor Philip Lowe said in a statement.