The central bank of Australia has raised its key interest rate unexpectedly and has indicated the possibility of further increases, due to concerns that policy needs to be stricter to ensure that inflation returns to its target level by 2025.
The cash rate of the Reserve Bank was raised by a quarter-point to 4.1%, the highest level reached since April 2012. With this move, the bank has tightened its policies by a cumulative total of 4 percentage points since May of the previous year. Only one-third of the money markets had anticipated the rate hike, and only 10 out of 30 economists had predicted it.
The consecutive rate hikes by the central bank illustrate the quickening pace of inflation in the services sector, a constrained labor market, and a reversal in the trend of house prices. As per Governor Philip Lowe, the decisions of the Reserve Bank of Australia are presently shaped by data that has shown some unpredictability. The main concern is that consumer prices have surged to approximately 7%, much higher compared to the target range of 2-3%.
On Friday, the industrial relations regulator of Australia announced an increase of 5.75% in the national minimum wage, which will be implemented from July 1st. This rate hike will benefit almost 20% of the workforce. Some economists have revised their estimates, with Deutsche Bank AG now anticipating the peak rate to reach 4.6% by September. Australian unemployment is currently hovering near decade lows at 3.7%.
The RBA doesn’t expect a recession down under, and Lowe reiterated that the path remains “narrow” to cooling inflation while preserving employment gains.
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