Reserve Bank of Australia Raises Interest Rates by 25 Basis Points to 4.1% as Expected

On March 17, the Reserve Bank of Australia (RBA) raised interest rates by 25 basis points to 4.1%, in line with market expectations.

The RBA issued a statement indicating that the committee approved the rate decision with a 5-4 vote. Inflation pressures are expected to rise significantly in the second half of 2025. There is a substantial risk that inflation will remain above the target level for an extended period. Inflation may stay above the target for some time. The bank will take all necessary measures to achieve its price and employment goals. Monetary policy is fully prepared to respond to evolving developments.

Previously, economists from Westpac, National Australia Bank, Citigroup, and Deutsche Bank adjusted their forecasts for the RBA, expecting a rate hike this week. Currently, the market prices in a 70% probability that the RBA will raise rates to 4.10% on March 17. Additionally, Westpac and NAB expect the RBA to raise rates again at the May meeting.

Inflation and employment data shift policy expectations

The shift in RBA monetary policy expectations stems from a recent series of “unexpectedly strong” data.

In Q4 last year, the core inflation indicator closely watched by the RBA remained high, significantly above the 2%-3% target range. Meanwhile, the unemployment rate, which was expected to gradually rise, unexpectedly fell to 4.1%, 0.3 percentage points below the RBA’s forecast.

GSFM investment strategist Stephen Miller stated, “Inflation is a real and urgent threat. Raising interest rates now is the most appropriate response. If we don’t act, we may have to resort to more aggressive policy tools in the future.”

Bank of America strategist Nick Stenner also pointed out that, given inflation remains above target and upside risks persist, “keeping rates unchanged will raise questions about the central bank’s inflation commitment.”

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