SYDNEY–The Reserve Bank of Australia raised its official cash rate for the first time since November 2010 on Tuesday to tame inflation, which surged to its highest level in 20 years.
The official cash rate was raised to 0.35% from a record low 0.10%, a move that was bigger than expected by many economists, with the RBA signaling more increases were likely in coming months.
“The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time. This will require a further lift in interest rates over the period ahead,” RBA Governor Philip Lowe said in a statement.
Australian consumer prices rose 5.1% on year in the first quarter, with core inflation rising 3.7%. Money market traders are betting that the RBA will raise the official cash rate to around 2.5% by year-end given the sudden emergence of inflation risks.
The decision to raise interest rates brings the RBA more into line with many of its global peers which have already begun, or are signaling, aggressive action to contain inflation.
The RBA has had to radically adjust quickly to shifting trends in the economy, after having said late in 2021 that interest rates might remain unchanged until 2024.
With one million households in Australia having never experienced an interest rate increase, the tapping of the policy brakes is likely to have a big impact on confidence.
Already there are signs confidence is slipping. Consumer confidence declined 6.0% last week, according to a weekly survey published earlier Tuesday by the ANZ Bank and pollster Roy Morgan.
The RBA expects unemployment to fall to 50-year lows over the next year but inflation is set to remain above its target band until at least mid-2024.
The RBA forecast that headline inflation will be running at 6% in 2022, with core inflation set to soar at 4.75%.
“Given both the progress towards full employment and the evidence on prices and wages, some withdrawal of the extraordinary monetary support provided through the pandemic is appropriate,” Mr. Lowe said.
— Write to James Glynn at james.glynn@dowjones.com