Lanterns outside the Reserve Bank of Australia (RBA) constructing in Sydney, Australia, Monday, February 6, 2023.
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On Tuesday, the Reserve Bank of Australia defied market expectations again by raising its benchmark interest rate by 25 basis points to 4.1%.
Economists polled by Reuters widely expected the central bank to keep interest rates regular. Accordingly, Australian stocks fell further on the news, with S&P/ASX200 last trade 1% lower. The australian dollar increased by 0.73% to 0.6667 against Dollar shortly after the choice because the central bank struggles with the most recent inflation rate 6.8% in April.
Reserve Bank of Australia Governor Philip Lowe said that although inflation within the country could have “passed its peak”, there have been still indicators showing that inflation was holding up.
“Recent figures indicate that upside risks to the inflation outlook have increased and the Council has responded to that,” Lowe said in a Tuesday statement.
“This further rate hike is intended to provide more confidence that inflation will return to goal inside an inexpensive timeframe,” Lowe added.
The central bank’s inflation goal is between 2% and three%.
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“If high inflation were rooted in people’s expectations, it could be very costly to reduce it later, leading to even higher interest rates and a greater increase in unemployment,” Lowe said.
The governor’s statement added that further interest rate hikes could also be required to bring down the country’s inflation rate, adding that it will “depend upon the evolution of the economy and inflation.”
“Further monetary policy tightening could also be mandatory to ensure inflation returns to goal inside an inexpensive timeframe… The Council will proceed to closely monitor developments in the worldwide economy, trends in household spending, and inflation and labor market prospects,” Lowe said.
A narrow path for a soft landing
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The central bank also highlighted the daunting task of stopping a recession within the Australian economy.
The statement said: “The board continues to try to keep the economy on a good footing as inflation returns to its goal range of 2-3 percent, however the road to a soft landing stays narrow.”
HSBC’s Paul Bloxham added that the RBA’s goal of achieving a soft landing or ending the speed hike cycle without pushing the economy into recession is becoming increasingly difficult.