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The Reverse Bank has decided to increase the cash rate target by 25 basis points to 3.85 per cent. As a result, the Australian dollar shot up 0.8 per cent to US$66.80 The ASX 200 declined,
0.7 per cent to 7,824.3 within two minutes of the announcement. “Inflation in Australia has passed its peak, but at 7 per cent is still too high and it will be some time yet before it is
back in the target range,” the RBA governor Philip Lowe explained. “Given the importance of returning inflation to target within a reasonable timeframe, the Board judged that a further
increase in interest rates was warranted today.” The RBA expects inflation to take “a couple of years” to return to the top of the target range, despite what it calls “a welcome decline” in
inflation. It predicts inflation to sit at 4.5 per cent by the end of the year, and 3 per cent in mid-2025. “The Board’s priority remains to return inflation to target. High inflation makes
life difficult for people and damages the functioning of the economy. And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later,
involving even higher interest rates and a larger rise in unemployment. “Medium-term inflation expectations remain well anchored, and it is important that this remains the case. Today’s
further adjustment in interest rates will help in this regard.” The RBA warned that further increases may be ahead, “to ensure that inflation returns to target in a reasonable timeframe, but
that will depend upon how the economy and inflation evolve.”