Australia unexpectedly hikes rates, hints at more tightening ahead

Australia's central bank in a surprise move raised its cash rate by 25 basis points and opened the door for more hikes ahead — resuming its tightening cycle after pausing in its previous meeting.

The Reserve Bank of Australia hiked by 25 basis points to 3.85%, going against market expectations. Economists polled by Reuters had widely predicted that the central bank would keep rates at 3.6% for a second consecutive meeting.

The Australian dollar strengthened further in Tuesday's afternoon session, rising 0.84% to 0.6687 against the U.S. dollar. The benchmark S&P/ASX 200 fell 0.9%.

The yield on the 10-year Australian government bond stood at 3.472% shortly after the decision.

The central bank highlighted the nationwide inflation rate of 7% was still "too high."

"While the recent data showed a welcome decline in inflation, the central forecast remains that it takes a couple of years before inflation returns to the top of the target range," the RBA said in its statement.

The central bank forecasts 2023's full-year inflation to stand at 4.5%.

The RBA also left the door open for more rate hikes ahead, in order to bring inflation down to its target of 2% to 3%.

"Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve," it said.

"The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that," it said.