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Australia: RBA breaks global trend, hikes rate by only 25bps to 2.60%

Australia: RBA breaks global trend, hikes rate by only 25bps to 2.60%
Australia: RBA breaks global trend, hikes rate by only 25bps to 2.60%

The Reserve Bank of Australia (RBA) has reportedly increased its benchmark interest rates by a mere 0.25 percentage point, going against the expectations of a more aggressive hike to curb the high inflation grappling the country.

The rate hike is half of what markets were expecting and shows the wariness of the officials in hitting the brakes too hard which might lead the country into recession, amidst a global growth deceleration.

The cash rate, which is the rate charged for loans to commercial banks and affects the costs of mortgages and other borrowings, has now reached a 9-year high of 2.60%.

Philip Lowe, Governor of RBA, stated that rates have already jumped significantly high in a short period while the economy faces growing uncertainty. The one source behind the uncertainty is the global economic outlook, which has been deteriorating recently.

Lowe added that another reason was how household spending responded to the tight financial conditions, with high inflation and interest rates putting further pressure on their spending. The full effect of higher interest rates will be felt in mortgage payments.

Lowe highlighted that the inflation in Australia was still too high and reiterated RBA’s commitment to bring it down within the 2-3% range.

According to Lowe, while global factors are the main reason behind the high inflation, the inability of the economy to fulfill the strong domestic demand is an important reason as well.

Meanwhile, RBA stated that inflation in the country is expected to peak at 7.75% this year, then drop to around 4% next year, and finally reach 3% in 2024.

Following the rate hike, the Australian dollar fell to US$0.6451 from US$0.6510, while the securities exchange ASX rose 3.8%.

Similar to central banks around the globe, RBA hiked its interest rate 6 times this year, which also include four 0.5 percentage point hikes.

However, its latest decision marks a disassociation from its counterparts that have taken more aggressive actions, such as the US Fed which raised its interest rate by 0.75% for the third time in a row.

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