SYDNEY (Reuters) -- Australia's central bank on Tuesday surprised markets by lifting interest rates by a smaller-than-expected 25 basis points (0.25%), saying they had already risen substantially, though it added that further tightening would still be needed.
Wrapping up its October policy meeting, the Reserve Bank of Australia (RBA) raised its cash rate to a nine-year peak of 2.60%, the sixth hike in as many months, which included four outsize moves of 50 basis points.
The bank had recently flagged a possible slowdown in the pace of hikes at some point. But markets had wagered it would go by half a point this week in part due to an aggressive Federal Reserve rate hike last month.
"The cash rate has been increased substantially in a short period of time," said RBA Gov. Philip Lowe in a statement.
"Reflecting this, the Board decided to increase the cash rate by 25 basis points this month as it assesses the outlook for inflation and economic growth in Australia," he added. "The Board expects to increase interest rates further over the period ahead."
Investors took the Australian dollar down about half a U.S. cent immediately on the announcement, but it soon steadied at AU$0.6491 to be down 0.3% on the day.
Interest rate futures jumped as the market priced in a likely lower peak for rates under the 4.0% previously expected, while three-year bond futures were down a steep 42.5 ticks at 96.750.
Markets have been taking their cue from uber-hawkish central banks abroad, where hikes of 75 or 100 basis points have become almost common.
However, Lowe cited a deteriorating outlook for the global economy as a major uncertainty, along with the response of Australian households to sharply higher borrowing costs.
The hikes already delivered will add around AU$800 a month in repayments to the average AU$620,000 mortgage, a dead weight for a population that holds AU$2 trillion in home loans.
House prices have also slid for five months in a row, led by big drops in Sydney and Melbourne.
That drop combined with losses in pension funds cut AU$484 billion ($313.92 billion) from household wealth in the three months to June, and an even larger decline is likely in the September quarter.
So far, consumer spending has held up well, thanks in part to a strong labor market where unemployment is near its lowest in five decades at 3.5%.
Data out last week showed there were almost as many job vacancies as unemployed, while job ads in Australia and New Zealand dipped only slightly in September to remain a sizable 56% above pre-pandemic levels.
"The fact that job ads and other leading indicators of Australia's labor market are still so strong suggests the RBA may have to take the cash rate further into restrictive territory than we currently expect to slow demand growth," said ANZ senior economist Catherine Birch.