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Title: Australia's central bank raises rates by 50 bps in hawkish surprise

Jun 07, 2022 02:10AM ET

By: AnalysisWatch

Australia's central bank on Tuesday raised interest rates by the most in 22 years, hinting at further monetary tightening to stem rising inflation that has stunned markets and sent bond yields soaring.

The Reserve Bank of Australia (RBA) raised its policy rate by 50 basis points to 0.85%, angering investors who had bet on a 25- or 40-basis-point increase.

The central bank had already raised rates by a quarter-point in May, the first hike since 2010, and many had assumed it would stick with quarter-point increments. The last hike was in the early 2000s.

Investors initially sent the local dollar up half a cent to as high as $0.7248, where it encountered profit-taking. Three-year bond yields rose 16 basis points to 3.27%, a level not seen since early 2012.

Futures priced in the real risk of a further 50 basis point rise in July and an interest rate of around 1.5% in August following the release of second quarter inflation figures, which are expected to be very high.

Consumer price inflation had already reached a 20-year high of 5.1% in the first quarter and could approach 6% this quarter amid rising costs for energy, food, rents, and housing.

In only his third week in office, Treasurer Jim Chalmers warned Australians that inflation was more likely to worsen before it improved and to brace for a "difficult and expensive" winter.

With inflation likely to remain high for longer, investors are betting that the RBA will have to raise rates to nearly 3% by the end of the year, which would be one of the most aggressive tightening campaigns ever

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