On Tuesday, the central bank in Australia hiked its interest rate by 25 basis points, which took it to 3.35%, the highest it has been in a decade.
The Reserve Bank of Australia (RBA) also reiterated that it would increase the interest rate further in the future, taking a more hawkish stance than had been expected by most.
Change in guidance
The Australian central bank dropped its previous guidance in its February policy meeting about not being on a pre-set path.
It also forecast that inflation would only come down to its target range of 2% to 3% in 2025. Philip Lowe, the governor of the RBA, said that the board believes further hikes in the interest rate would be needed.
He said that they would increase the rate in the coming months for bringing inflation back to their target range and also said that the high inflation period was just a temporary one.
The hawkish tone of the RBA took the markets by surprise, as it put an end to any expectations of the central bank hitting pause on its tightening campaign.
Before the decision, markets had priced in the interest rate to peak at 3.75%, but now it has been changed to 3.9%, with two more increases expected in March and April.
The reaction
There was a rise in the local dollar in response to the announcement, which climbed to $0.6940, adding on to previous gains.
There was also a 15 basis point rise in 3-year government bond yields to 3.254%, while a 15 basis points increase in 10-year yields pushed them up to 3.615%.
Market analysts said that the decision was not that surprising, but it was the hawkish tone as well as the forward guidance that took the markets by surprise.
They said that the change in tone indicated that the RBA had already made up its mind and would hike the interest rate more in the coming months, as long as the economic data turns out to be as per their forecasts.
The expectations
A 25 basis point increase had been expected by markets and there had even been a slight risk of a bigger hike in light of the recent inflation data that had turned out to be higher.
The RBA had started hiking in the previous May, which makes this its ninth hike, as it has lifted the interest rate by a total of 325 basis points.
According to Lowe, core inflation had turned out to be higher than expectations and over the forecast of the central bank.
This year, inflation is expected to drop to 4.25%, but it will come down to 3% by mid-2025. In the next two years, the RBA also believes that economic growth will be an average of 1.5%.
So far, the interest rate hikes would increase mortgage repayments by A$900 for a mortgage of A$500,000.
January saw housing prices decline for the ninth consecutive month, with prices in Sydney and Melbourne dropping 10% as opposed to a year earlier.