The Reserve Bank of Australia has hiked interest rates for the second month in a row as war in the Middle East compounds inflation concerns.
In a split five-four decision on Tuesday, the central bank’s monetary policy board lifted the cash rate by 25 basis points to 4.1 per cent, following a hike of the same size in February.
The move was tipped by the majority of economists and money markets, which had priced in the chance of a hike at more than two-thirds.
Domestic price pressures, including a tight labour market and strong economic growth, were already pushing inflation too high for the RBA’s liking before the US-Israeli attack on Iran led to the closing of the Strait of Hormuz and plunged global energy markets into chaos.
Headline inflation rose 3.8 per cent in the year to January, according to monthly data released by the Australian Bureau of Statistics, above the RBA’s 2-3 per cent target band.
The Reserve Bank has in the past been loath to move rates at meetings not immediately following the release of quarterly inflation figures, when it can get a gauge of its preferred measure of underlying price growth – the quarterly trimmed mean.
But as the benchmark oil price spiked from about $US70 a barrel to as high as $US119 a barrel and inflation expectations soared, precedent seemed less important.
Ahead of the decision, money markets were almost fully priced in for two further rate rises in 2026, which would bring the cash rate to 4.6 per cent by Christmas.
Each 25 basis point rise adds about $90 in monthly repayments to a typical owner-occupier home loan of $600,000.
Attention now turns to what tone governor Michele Bullock strikes in her post-meeting press conference, as traders try to guess how many more hikes the RBA has in store.
CreditorWatch chief economist Ivan Colhoun said the RBA’s decision was justified.
“While this is news that is unwelcome for both households and businesses, neither is the situation where inflation is allowed to run above-target for a further extended period,” he said.
Jacob Shteyman
(Australian Associated Press)