The Australian dollar rose broadly in Asian trading on Tuesday against a basket of major and minor currencies, resuming its strong gains against the US dollar after a two-day pause and moving back toward a three-year high, after the Reserve Bank of Australia raised interest rates for the first time since November 2023.

The Reserve Bank of Australia said inflation is likely to remain above target for some time, making it appropriate to raise the policy rate. It added that private demand is growing faster than expected, capacity pressures are stronger than previously assessed, and labor market conditions remain relatively tight.

The tightening step was broadly in line with global market expectations and followed data showing inflation reached its highest level in six quarters.

Price Overview

The Australian dollar rose 1.15% against the US dollar to 0.7034, from an opening level of 0.6954, and recorded a session low at 0.6946.

The Australian dollar had closed Monday down 0.2% against the US dollar, marking a second straight daily loss, amid corrective trading and profit-taking after reaching a three-year high at $0.7094.

Reserve Bank of Australia Decision

In line with expectations, the RBAs monetary policy board decided on Tuesday to raise the benchmark interest rate by 25 basis points to 3.85%, marking the first Australian rate increase since November 2023, after holding rates unchanged at the previous three meetings.

The bank said private demand is expanding faster than expected, capacity constraints are greater than previously estimated, and labor market conditions remain somewhat tight. It noted that inflation pressures increased markedly in the second half of last year.

The RBA added that economic growth is running stronger than expected and inflation is likely to stay above target for a period, justifying the decision to raise the policy rate.

RBA Governor Michele Bullock Comments

RBA Governor Michele Bullock said:

Inflation remains too high.

We cannot allow inflation to move out of control.

There is concern about the persistence of elevated inflation.

A 50 basis point rate hike was not discussed.

The board does not have a preset path for interest rates.

The board will remain cautious on rates.

We aim to lower inflation while preserving labor market strength.

A sustained rise in the Australian dollar would help reduce import prices.

It is unclear whether this will become a full tightening cycle.

Nothing can be ruled out.

The board will closely monitor incoming data.

Quarterly inflation readings need to decline.

Australian Rate Expectations

After the meeting, pricing for a 25 basis point RBA rate hike in March remained below 50%.

Market pricing for a 25 basis point hike in May rose to above 80%.

Investors are awaiting further data on inflation, unemployment, and wages in Australia to reassess the rate outlook.

Analyst Views

Harry Murphy Cruise, Head of Economic Research at Oxford Economics Australia, said that with the RBA now expecting a slower decline in inflation, risks clearly lean toward a series of rate increases rather than a single move, especially given that the latest decision was unanimous.

Abhijit Surya, Asia-Pacific Chief Economist at Capital Economics, said the RBA clearly sees the path to lower inflation as long and difficult. He expects only one more rate hike in May, but noted that since the bank does not expect core inflation to return to the midpoint of the 2%3% target band until early 2028, it may ultimately need to raise rates higher than currently projected.