AUSTRALIA’S central bank announced a surprise interest rate hike to an 11-year high on Tuesday (May 2), dashing hopes it would hold them steady as inflation shows signs of slowing.

The Reserve Bank of Australia lifted the key interest rate by 25 basis points to 3.85 per cent, wrong-footing many economists who predicted there would be no change.

Figures released in late April showed the consumer price index dropping to 7 per cent, down from 7.8 per cent in December but still stubbornly above the bank’s target of between 2 per cent and 3 per cent.

Reserve Bank governor Philip Lowe said inflation had “passed its peak”, but was still too high.

“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,” he said.

Lowe warned it could take a “couple of years” before inflation returned to an acceptable level, and flagged further rate hikes could be on the horizon.

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“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve.”

The Reserve Bank held interest rates steady at its last meeting in April, ending a series of 10 successive hikes in a row.

Lowe said this had allowed the bank to take stock of the economy, before deciding on the latest rise.

Australians are now forking out an extra A$250 (S$226) every week to meet the repayments on an average mortgage of about A$600,000 (S$543,266).

Like other countries fighting inflation, Australia faces a delicate balancing act to bring prices down without stifling economic growth and sparking a recession.

Central banks around the world continue to tighten monetary policy in the face of runaway food and energy prices, exacerbated by the war in Ukraine. AFP