The Reserve Bank of Australia has raised interest rates by 25 basis points, citing concerns about persistently high inflation pressures.

The Reserve Bank of Australia (RBA) has unexpectedly decided to raise interest rates from 3.6% to 3.85%, causing the Australian Dollar to strengthen impressively in trading on Tuesday (May 2nd). AUD/USD briefly surged over one percent above the 0.6700 threshold before moderating to the 0.6690s as it entered the European session.

audusdAUD/USD Daily Chart via TradingView

Market participants had previously expected the RBA to keep interest rates unchanged in this week's policy meeting. The reason was that inflation data had begun to show signs of slowing down.

Australia's inflation data for the first quarter of this year showed the slowest pace since late 2021. However, the RBA raised interest rates again because inflationary pressures were too high.

"Despite the latest data showing encouraging inflation slowdown, the central forecast remains that it will take a few years for inflation to return to the top of the target range; inflation is expected to be 4.5% in 2023 and 3% in mid-2025," said RBA Governor Philip Lowe, "Price inflation has slowed due to a better supply-demand balance after the pandemic disruptions. But service price inflation is still very high and broad-based, and overseas experience suggests risks of increases."

The RBA's announcement suddenly boosted the AUD/USD exchange rate from 0.6630 to over 0.6690 within minutes. The market began considering whether the RBA will raise interest rates again at next month's meeting. At the same time, there are concerns that other central banks may share the same view and take unexpected actions in their upcoming policy meetings.

"I would think the RBA now thinks they need to see a 4 in front of the cash rate before thinking they might be done," said Ray Attrill, head of FX strategy at National Australia Bank. "Certainly the data flow since April has been on the strong side," he added. "It's very probable that another one is to come, though whether it's as soon as June remains to be seen."

The US Federal Reserve will announce its interest rate decision on Wednesday, while the European Central Bank on Thursday. Currency pairs related to the US dollar and euro are potentially at risk of unexpected turbulence due to the ups and downs of interest rate speculations until the public knows the content of their policy statements.