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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

The Reserve Bank of Australia on Tuesday raised interest rates to the highest level in 22 years and announced further tightening measures to curb rising inflation, shocking markets and sending bond yields soaring.

The Reserve Bank of Australia (RBA) raised rates by 50 basis points to 0.85% at the end of its June meeting, surprising investors who had expected a change of 25 or 40 basis points.

In May, the central bank had raised its benchmark interest rate by a quarter of a percentage point, the first increase since 2010, and many expected it to remain at a quarter of a percentage point. The last time rates were raised more was in the early 2000s.

Investors initially sent the dollar into the zone with a half-cent rise to $0.7248, from where it recovered and consolidated its gains. Bonds were dragged down: The yield on the three-year bond rose 16 basis points to 3.27%, a level not seen since early 2012.

Futures were betting on the real risk of another 50 basis point rate hike in July and a rate of around 1.5% in August after the release of second quarter inflation data, which is expected to be strong.

Lowe has already said that the "neutral" rate could be 2.5%.

Consumer price inflation hit a 20-year high of 5.1% in the first quarter and could approach 6% this quarter due to rising energy, food, rent and housing costs.

In his third week in office, Treasurer Jim Chalmers warned Australians that inflation would get worse rather than better and that they should brace for a "difficult and expensive" winter.

Chalmers promised that the budget to be passed in October would include some cuts to the cost of living, with a focus on childcare and health care. The Labor government, which replaced the Liberal-National Coalition at the late May election, inherited a debt of almost A$1 trillion ($718.70 billion) and a never-ending budget deficit.

With inflation likely to remain high for a long time, investors are betting that the RBA will be forced to raise interest rates to nearly 3% by the end of the year in one of its most aggressive rate hike campaigns yet.

(US$1 = A$1.3914)

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