The Reserve Bank of Australia (RBA) took the spotlight in the late stages of Asia Pacific trading as it unexpectedly raised the cash rate by another 25 basis points (bps). This comes as a surprise to the market, as it marks two consecutive meetings in which the Australian central bank has defied expectations by increasing the rate. The cash rate now stands at 4.10%.

RBA Governor Lowe took a hawkish stance and made it clear that they are committed to taking necessary actions to bring inflation back within the target range. It seems surprising that the markets continue to anticipate a pause in rate hikes despite Lowe consistently emphasizing that inflation remains significantly high.

Lowe reiterated this stance in the rate statement, acknowledging that inflation in Australia has already reached its peak but is still at an elevated level of 7%, which is above the target range. He also noted that it will take some time before inflation returns to the desired range. While the rate hike may cause discomfort for households and businesses, the RBA believes it is a necessary step to combat the primary threat, which is inflation.

The forward guidance passage, which provides an indication of future monetary policy, remains unchanged from May. This suggests that the RBA may be preparing for further rate hikes in the future. To gauge market expectations, let’s examine the changes in the Overnight Index Swap (OIS) curve before and after the RBA decision.

AUD/USD Live Chart