EWA - Pausing rate hikes may be harder than central banks think - just look at Australia

2023-05-02 05:36:56 ET

The Reserve Bank of Australia surprised markets with a hike of 25 basis points following a policy meeting Tuesday, resuming an aggressive campaign by raising its benchmark rate to 3.85%. The decision comes despite a prior attempt by the RBA to pause its hiking cycle .

"Inflation in Australia has passed its peak, but at 7% is still too high and it will be some time yet before it is back in the target range," RBA Governor Philip Lowe said in a statement. "Given the importance of returning inflation to target within a reasonable time frame, the board judged that a further increase in interest rates was warranted today.”

"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."

The move highlights the difficulties facing other central banks, like the U.S. Federal Reserve, which many expect to soon pause its own aggressive monetary policy cycle. It's latest decision will arrive on Wednesday, with FOMC officials kicking off their May meeting this morning.

ETFs: iShares MSCI Australia ETF ( NYSEARCA: EWA ); Australian All Index ( AS30 ); Invesco CurrencyShares Australian Dollar Trust ETF ( NYSEARCA: FXA )

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