Reserve Bank of Australia Raises Key Interest Rate by 0.25%p... "Half of Market Expectations"

Australian Dollar Value Drops by Up to 1% Temporarily

[Image source=Yonhap News]

[Asia Economy Reporter Lee Ji-eun] The Reserve Bank of Australia (RBA) raised its benchmark interest rate by 0.25 percentage points (p.p.), marking the sixth consecutive month of rate hikes. Following the rate increase, the Australian dollar fell by up to 1% intraday, while the stock market rose by more than 3%.

On the 4th, after the monetary policy meeting, the RBA announced it would raise the benchmark interest rate from the previous 2.35% to 2.6%, an increase of 0.25 p.p. Bloomberg reported that while major global banks such as Westpac Bank and Royal Bank of Canada had mostly expected a 0.5 p.p. hike, the RBA raised rates by a smaller margin than market expectations.

Philip Lowe, Governor of the RBA, stated in a press release, "Interest rates have risen sharply over a short period," and added, "Reflecting this trend, we have decided to raise the rate by 0.25 p.p. this month to assess Australia's inflation and economic growth outlook." Since November 2010, when the RBA raised the benchmark rate from 0.1% to 0.35%, it has implemented a series of big steps (0.50 p.p. rate hikes) for five consecutive months starting from June.

Governor Lowe said, "The committee is firmly committed to returning inflation to target and will take all necessary measures to achieve this," indicating that further rate hikes are expected. He also cited the global economy and the sharp rise in borrowing costs for Australian households as sources of uncertainty.

On the other hand, economic experts forecast that the pace of rate increases will gradually slow down. Gareth Aird, Head of Australian Economics at Commonwealth Bank of Australia (CBA), the country's largest bank, explained, "Australia's benchmark interest rate remains in a limited range," and "the RBA is moving against the trend of major central banks." Surin Ong, Head of Australian Economics at RBC Capital Markets, also said, "The RBA's rate hike below expectations symbolizes an important signal regarding the future pace of rate increases."

Earlier, Governor Lowe had commented on the October rate hike, stating, "We are now close to a more normal environment," implying that the likelihood of large rate adjustments has decreased.

Following the smaller-than-expected rate hike, the Australian dollar plunged by up to 1% intraday, falling to 0.6449 dollars. The yield on the Australian 10-year government bond dropped by 0.24 p.p. to 3.6585%.