By Ambar Warrick
Investing.com -- The Reserve Bank of Australia hiked interest rates as expected on Tuesday, bringing them to an over 10-year high as it moves to contain rising inflation, with the bank stating that more hikes were still needed to combat runaway price pressures.
The RBA raised its benchmark cash target rate by 25 basis points to 3.60%, having now raised rates by a total of 350 bps since early-2022.
RBA Governor Philip Lowe said in a statement that inflation had likely peaked in Australia, and goods price inflation was expected to moderate in the coming months. Australian consumer price index inflation eased more than expected in January, but remained pinned near 30-year highs.
Lowe noted that services price inflation still remained high, with increasing rents likely factoring into inflation. He reiterated that inflation will likely come within the RBA’s 2% to 3% only by mid-2025.
The RBA will continue to adopt a data-driven approach towards future rate hikes, Lowe said. But he warned that the path to achieving a “soft landing” for the Australian economy “remains a narrow one.”
Lowe also warned that economic growth is likely to be “below trend” over the next couple of years, and that unemployment is set to increase amid slowing growth. But the labor market is likely to remain tight in the near-term, with unemployment hovering near 50-year lows.
The Australian economy barely avoided a contraction in the fourth quarter of 2022, as a strong trade surplus only slightly offset slowing consumption and business growth. Unemployment also rose slightly during the quarter.
A high cost of living, coupled with rising housing and mortgage prices, has weighed heavily on household spending and savings in recent months, which in turn drove Australian consumer sentiment to pandemic-era lows.
A staggered recovery in China - Australia’s biggest trading partner - may also result in sluggish economic trends for the country. Data released earlier on Tuesday showed that Australia’s trade balance unexpectedly shrank in January.
The Australian dollar sank 0.3% after the RBA decision.