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Australia raises benchmark rate by 25 bps to decade-high of 3.35%

RBA warns further increases will be needed

The Reserve Bank of Australia said core inflation had been higher than expected and higher rates would be needed to ensure that inflation returns to its target of 2% to 3%.   © Reuters

SYDNEY (Reuters) -- Australia's central bank raised its cash rate 25 basis points to a decade-high of 3.35% on Tuesday and reiterated that further increases would be needed, while dropping previous guidance that it was not on a preset path.

Wrapping up its February policy meeting, the Reserve Bank of Australia (RBA) said core inflation had been higher than expected and higher rates would be needed to ensure that inflation returns to its target of 2-3%.

Markets had expected a quarter-point move, with some risk of a bigger rise given recent inflation data had surprised on the high side. This was the ninth hike since last May, lifting rates by a total of 325 basis points.

Inflation is expected to decline to 4.75% this year and only slow to around 3% by mid-2025, the top of the central bank's 2-3% target range, according to the RBA's latest forecasts.

A red-hot fourth-quarter inflation report doused hopes for a pause this month, with core inflation accelerating to 6.9% from a year ago, above the central bank's previous forecast of 6.5%.

That led markets to double down on bets that the cash rate will have to peak nearer 3.85%, also in part to keep pace with the U.S. Federal Reserve. The Fed is now seen raising rates to above 5% to rein in still-strong price pressures. 

The RBA also expects economic growth to average around 1.5% over 2023 and 2024.

The local dollar shot up to $0.6940 after the rate decision, extending earlier gains, while short-term bonds tumbled to 96.73, and markets nudged up the peak for cash rates to 3.85%, compared with 3.75% previously. 

A Reuters poll of 31 analysts found 19 expected rates to peak at 3.60%, likely in March, and stay there all year.

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