Australian government bond prices plunged and the country’s currency surged after the central bank surprised markets on Tuesday with another rate hike.
The Reserve Bank of Australia raised its benchmark borrowing costs by 25 basis points to 3.85% after traders had expected no move.
The RBA said inflation, which is running at an annual rate of 7%, remains too high and a further tightening of monetary policy may be required.
Investors thought that consumer price inflation easing from a 30-year high of 7.8% in the December quarter may have encouraged the RBA to stay its hand and so many were caught wrong-footed, particularly by the prospect of more rate increases to come, analysts noted.
“At this stage it looks like a hawkish hike,” said Jim Reid, strategist at Deutsche Bank.
The yield on the policy-sensitive 2-year Australian government bond TMBMKAU-02Y,
The RBA’s move comes a day before the U.S. Federal Reserve reveals its own interest rate decision. It is expected to raise rates by 25 basis points to a range of 5% to 5.25%.
Investors expect that to be the final Fed hike, but its Aussie peer’s renewed hawkishness caused some to wonder whether a similar stance may be adopted by the world’s most important central bank.
However. the U.S. 2-year Treasury yield TMUBMUSD02Y,
