RBA surprises with 25 bps rate hike; cash rate raised to 3.85%

• Prior 3.60%
• The priority remains to return inflation to target
• Some further tightening of monetary policy may be required
• But that will depend upon how the economy and inflation evolve
• While the recent data showed a welcome decline in inflation Inflation Inflation is defined as a quantitative measure of the rate in which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general level of prices where a given currency effectively buys less than it did in prior periods.In terms of assessing the strength or currencies, and by extension foreign exchange, inflation or measures of it are extremely influential. Inflation stems from the overall creation of money. This money is m Inflation is defined as a quantitative measure of the rate in which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general level of prices where a given currency effectively buys less than it did in prior periods.In terms of assessing the strength or currencies, and by extension foreign exchange, inflation or measures of it are extremely influential. Inflation stems from the overall creation of money. This money is m Read this Term, the central forecast remains that it takes a couple of years before inflation returns to the top of the target range
• Inflation is expected to be 4½ per cent in 2023 and 3 per cent in mid-2025
• Given the importance of returning inflation to target within a reasonable timeframe, the Board judged that a further increase in interest rates was warranted today
• Full statement

This runs against the consensus view in the market, which was expecting the RBA to leave the cash rate unchanged. I certainly did not expect this as well but if there was a central bank who really does not stick to the convention, it would have to the RBA I guess.

The aussie has jumped on the decision, with AUD/USD moving up from 0.6630 to 0.6685 and at first glance, there isn't much changed to the statement and forward guidance. One can view it as a dovish rate hike but the surprise decision in itself could also mean that they are not done with the tightening cycle perhaps.

Here's a look at the forward guidance change from April to May:

The Board expects that some further tightening of monetary policy may well be neededbe required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve. The decision to hold interest rates steady this month provides the Board with more time to assess the state of the economy and the outlook, in an environment of considerable uncertainty. In assessing when and how much further interest rates need to increase, the Board will continue tobe paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market. The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.