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RBA Decision Sees AUD Jump

Key Takeaways
  • The Reserve Bank of Australia raised the cash rate by 25bps to 3.85% to combat high inflation and may consider further tightening in the future.
  • This was the 11th rate increase in a year, bringing borrowing costs to their highest level since April 2012.
  • The RBA reiterated its determination to return inflation to target and will do what is necessary to achieve that.

 

The Reserve Bank of Australia (RBA) caught markets off-guard during its May meeting by raising its cash rate by 25 basis points to 3.85%, despite expectations of a pause in tightening. This marks the 11th rate increase within a year, pushing borrowing costs to their highest level since April 2012. The central bank cited the high inflation rate of 7% in Australia and a tight labour market as the primary drivers behind the rate hike. However, RBA officials noted that any future tightening would depend on the evolution of the economy and inflation.


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Additionally, the interest rate on Exchange Settlement balances saw an increase of 25bps to 3.75%. The Australia Interest Rate is projected to trend around 2.60% in 2024 and 2.00% in 2025. The RBA emphasised its commitment to returning inflation to target levels and stated it would undertake any necessary measures to achieve this goal.

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