- 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.
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.