According to Investing.com, the central bank raised interest rates by 25 basis points, citing high inflation.

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©Reuters.

Investing.com – The Reserve Bank of Australia raised interest rates on Tuesday as expected, citing a slower-than-expected decline in inflation, while also raising its outlook for consumer inflation over the next two years.

The Reserve Bank of Australia raised interest rates from 4.10% to 4.35%, in line with market consensus. The rate hike is the first change in monetary policy under new Governor Michele Bullock, who partially announced the move in October.

Tuesday’s gains came after Australia’s economy grew more than expected in the third quarter due to rising fuel prices and an unexpected rebound in retail spending.

The quarter also beat expectations as spending remained high, supporting inflation.

This led to some tightening remarks from Bullock ahead of the meeting and left the market largely ready for a 25 basis point rate hike.

“Inflation in Australia has passed its peak but remains too high and is proving more persistent than expected just a few months ago. While CPI inflation is expected to continue to fall, progress appears to be slower than previously expected,” the Premier Bullock said in a statement Tuesday.

“The (Monetary Policy) Committee assesses today’s rate hike to provide greater assurance that inflation will return to target within a reasonable period of time.”

Bullock said that the CPI inflation rate is currently expected to be around 3.5% by the end of 2024, and will remain at the upper limit of the RBA’s 2% to 3% target range by the end of 2025. The Reserve Bank of Australia previously forecast that inflation is expected to fall within the target range by mid-2025.

Inflation has remained above the RBA’s target range for more than a year following a post-COVID boom.

Bullock also proposed a largely data-driven approach to policy tightening, noting that the Australian economy was more resilient than initially expected. But growth is expected to remain below trend, while rising to 4.25% in the coming months.

Although the Reserve Bank of Australia has raised interest rates by a cumulative 400 basis points since the beginning of 2022, it has kept interest rates at 4.1% since May 2023. The move was largely aimed at assessing the impact of rising interest rates on the Australian economy, with inflation well away from its annual peak.

But with inflation rising again last quarter, the central bank may be forced to raise interest rates further to cool overheating prices.

The Australian dollar fell 0.4% after the RBA decision, while falling 0.2%.

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