Australia central bank stuns with 25-bps hike, warns more might be needed

Australia’s central bank on Tuesday stunned markets by raising its cash rate 25 basis points when traders had looked for an extended pause, saying inflation was way too high and warned that even further tightening may be needed to bring it to heel.

The unambiguously hawkish policy stance sent the Australian dollar soaring and bond futures tumbling as markets quickly lifted the peak for interest rates.

Wrapping up its May policy meeting, the Reserve Bank of Australia (RBA) raised rates to 3.85% and said “some further tightening” may be required to ensure that inflation returns to target in a “reasonable timeframe”.

Markets, as well as a majority of analysts, had been wagering heavily on a steady outcome given core inflation had eased a little more than expected and the full pain of the RBA’s past tightening was yet to be felt in the economy.

The Australian dollar shot up by 1% to $0.6695, while three-year futures dived 23 ticks to 96.780, the sharpest daily drop since mid-2012.

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