RBA Breaks Two-Year Hiatus, Lifts Rates Amid Stubborn Inflation and Strong Growth
By Stella Qiu and Wayne Cole
SYDNEY, Feb 3 (Reuters) – Australia’s central bank has ended a two-year pause on interest rate hikes, moving decisively on Tuesday to counter stronger-than-anticipated economic growth and inflation that officials warn will linger above target.
The Reserve Bank of Australia (RBA) lifted its benchmark cash rate by 25 basis points to 3.85%, marking its first increase since 2022 and pivoting away from the easing cycle that concluded just six months ago. The move aligns Australia with Japan as the only major developed economies currently tightening monetary policy, while markets still anticipate cuts from the U.S. Federal Reserve, the Bank of England, and the Bank of Canada later this year.
"The board judged that inflation is likely to remain above target for some time and it was appropriate to increase the cash rate target," the RBA said in its post-meeting statement. It noted that while some inflationary pressures were temporary, private demand was growing faster than expected, capacity pressures had intensified, and the labour market had tightened further.
The decision, which markets had priced with a 78% probability following hot inflation and jobs data, triggered an immediate market reaction. The Australian dollar jumped 1.1% to US$0.7020, while three-year bond futures fell sharply. Traders now see a 75% chance of another hike in May, with expectations building for a total of 40 basis points of tightening in 2025.
Inflation Surprise Forces RBA's Hand
The RBA had been a relative global outlier in its cautious approach to rate hikes during the initial inflation surge, prioritizing labour market gains. However, that strategy is now being tested. Consumer price growth has exceeded forecasts for two consecutive quarters, with the core measure—preferred by the bank—hitting an annual rate of 3.4%, its highest in over a year and above the RBA's 2-3% target band.
Recent data has painted a picture of an economy running hot: unemployment unexpectedly fell to a seven-month low of 4.1% in December, consumer spending remains robust, housing prices are at record highs, and credit is readily available. In a separate economic update, the RBA conceded that financial conditions may not be restrictive at all and could even be accommodative.
The bank acknowledged the risk of persistently high inflation even under the technical assumption of more than two rate hikes this year, suggesting policymakers are prepared to stay on their toes.
Voices from the Ground
"This was inevitable," said Michael Chen, a Sydney-based financial analyst. "The data left them no choice. The real question is whether they've acted too late and will now have to play catch-up, which is always more painful for households."
"Absolutely devastating for young families trying to get into the market," remarked Sarah Prentiss, a first-home buyer from Melbourne, her tone sharp with frustration. "They paused for two years giving everyone false hope, and now they're slamming on the brakes. It feels like we're always the ones paying for their policy missteps."
"It's a necessary recalibration," countered David Walsh, an economics professor at the University of Adelaide. "The RBA is wisely responding to domestic data rather than blindly following global trends. A measured hike now is preferable to aggressive moves later if inflation becomes entrenched."