The Australian dollar rose after the Reserve Bank of Australia surprised markets with an unexpected quarter-point interest rate hike. Now, the rate is at 3.85%, the highest level since April 2012. This decision led AUD/USD to jump from 0.6620 to 0.6720 in just a few hours.
Expectations for further rate hikes were also revised on the futures market, and currently, market participants estimate rates to hit 4% by September. This is slightly higher than the previous forecast of 3.6%.
The unexpected increase following the pause in April occurred shortly after the RBA recommended revising the current composition of the board of directors and strengthening its connections. Treasurer Jim Chalmers is expected to announce within a month or two whether he will extend Governor Philip Lowe's term or appoint someone new. The unexpected increase also suggests a change in the RBA's assessment of the trade-off between growth and inflation.
With the Australian dollar rising more than 1%, the yield on three-year government bonds jumped by 22 basis points. It is also clear that the RBA's decision is a step against market expectations, closing the policy gap with countries such as New Zealand, the US, and the European Central Bank.
Meanwhile, criticism is growing towards RBA Governor Philip Lowe, who held on to a soft stance for too long after the pandemic era, stating that rates are unlikely to rise until 2024. The RBA began aggressively raising rates in May 2022, and then, earlier than other central banks, decided to pause the tightening policy cycle, which turned out to be a wrong decision.
Updated quarterly forecasts were also presented, which will be fully published on Friday. They have changed little compared to three months ago, where it was said that inflation would decrease to 4.5% this year and to 3% in mid-2025. Rapid growth in unit labor costs was noted, while productivity growth slowed down. The RBA remains on guard regarding the risk of unwinding the price-wage spiral.
This week, both the Federal Reserve and the European Central Bank are also expected to raise rates again.