The benchmark ASX 200 index finished Tuesday in the red following the Reserve Bank of Australia’s surprise decision to increase rates by 25 basis points to 0.35%.

Although markets had priced in an increase at this week’s meeting on monetary policy, most had tipped only a 15 basis point jump to 0.25%.

The move marks the first increase passed by the Reserve Bank since November 2010, and comes as inflation continues to accelerate ahead of the central bank’s expectations.

“The Board judged that now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic,” RBA governor Philip Lowe said in his comments following the announcement.

“The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected. There is also evidence that wages growth is picking up. 

“Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions.”

Mr Lowe added that the RBA is “committed to doing what is necessary” to keep inflation in check, signalling further increases in the months ahead.

Financial markets are currently priced for the cash rate to hit close to 2.5% by the end of the year. 

Stephen Miller, investment strategist with GSFM, said a rate that high “appears excessive” but noted it’s still “within the realm of possibility”. 

“A late start, and an overly conservative approach to the withdrawal of historically high levels of monetary stimulus has meant the RBA runs the risk of making the same mistakes as the US Federal Reserve and European Central Bank (ECB), in placing themselves out of the realm of “first best” solutions,” he said. 

“Both the Fed and ECB are now being forced to confront a “least bad” approach. In other words, choosing between meeting an inflation target by risking a recession, or allowing high and potentially destabilising inflation to persist well into 2023.”

Mr Miller said Tuesday’s moves represented a step in the right direction for Australia to avoid that same fate.

Sources:

• Shane Oliver Twitter, #RBA hikes +0.25% taking cash rate to 0.35%
• Reserve Bank of Australia Media Release, Statement by Philip Lowe, Governor: Monetary Policy Decision
• Nine.com.au, RBA increases interest rates for the first time in more than 11 years