Australia raised interest rates less than expected Tuesday October 4 boosting stocks and dragging the local dollar lower, as officials worry about a slowing global economy sparked by rising borrowing costs and rising prices.
The Reserve Bank of Australia's 0.25 percentage point hike took the cash rate to a nine-year high of 2.60 per cent, but the increase was half what was predicted as it joins other countries around the world in trying to control runaway inflation.
The RBA said that it had already increased rates significantly in a short period of time, even though it held its inflation estimate for the year with a peak of 7.75 per cent, before dropping to just over 4 per cent in 2023.
In Australia, inflation is too high, as is the case in most countries, according to the bank.
It said that the surge in prices had been driven by global factors and strong spending levels in Australia.
The move highlights the tightrope central banks have to walk in order to bring down inflation while trying to cushion their economies from a recession, a battle many commentators warn they are losing.
The United Nations warned that the tightening of the programmes could cause prolonged stagnation, and the Federal Reserve and European Central Bank flagged further hikes at their next meeting.
Sydney's ASX 200 rose 3.8 per cent after the announcement, while the Australian dollar dropped from $0.6510 to as low as $0.6451, though it edged back slightly.
After Australia had to play catch-up with other central banks already that trajectory is dying down, according to City Index Senior Market analyst Matt Simpson, who said the decision was telling. As long as medium-term inflation expectations continue to behave, the case for a much higher cash is fading, he said.
Federal Treasurer Jim Chalmers said the rise and international warnings of economic slowdowns would shape his budget announcement, which is due in three weeks.
He told a news conference in Canberra that the storm clouds are gathering again in the global economy.
There's no need to pretend that the global situation hasn't deteriorated.
There is no use pretending that rising inflation isn't punching a hole in family budgets.