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RBA Hikes Official Cash Rate, Joins Global Hawks

The Reserve Bank of Australia (RBA) is the latest central bank to raise its rate forecast, joining global hawks after the Reserve Bank of New Zealand (RBNZ) raised its policy rate to 2% from 1.5% at the end of May.

The RBA raised the official interest rate (OCR) by 0.5 percent, higher than the 0.35 percent expected. The surprise sparked a move in the AUD/USD pair, which has been in the spotlight with radical competition that could set the tone in the short to medium term. Inflation in Australia rose to 3.75 percent in March, prompting the RBA to drop its rhetoric about patience and take action.

RBA Hikes Official Cash Rate

Investors and traders tend to dislike surprises and the RBA's stance could leave Asian markets already prone to bearish trends confused amid fears of a global recession and geopolitical pressure from Ukraine. Higher interest rates in the banking sector can ease inflation, but also reduce investment across the economy as access to credit becomes more expensive. ASX is pointing down in premarket trading at the time of writing.

One of the main drivers of uncertainty is crude oil. Spot crude prices have shown little sign of slowing their gains, putting pressure on sectors of the economy from manufacturing to travel. Assuming the COVID-19 pandemic subsides, global economic activity should continue to grow along with fuel demand.

Spot gold prices started to rise in the second week of June after being relatively stable in May, possibly related to the recent USD weakness. That could change next week depending on the US Federal Reserve's interest rate decision. The US Federal Reserve is expected to raise its interest rate forecast by 0.5 percent in June and July before a possible pause in September.

The NFP report showed that the US added 390,000 jobs in May, meaning the Federal Reserve may see reason to raise interest rates by more than 0.5 percent in June. After all, the recent inflation rate of 8.1 percent, and only fears of growth due to the pandemic and the Ukraine conflict are preventing the central bank from becoming tighter.

What is the RBA's Official Cash Rate (OCR)?

The OCR is the RBA's interest rate guide for the banking sector. Central banks guide the banking and broader financial sector with their key overnight interbank lending rates. When the RBA's policy rate is in positive territory, banks get more loans overnight to other banks. They also make more retail loans and offer higher savings rates. OCR operates a variety of interest-related financial products such as bonds, savings accounts, business loans, and mortgages.

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This material does not contain, and should not be construed as, investment advice, investment recommendation, offer or solicitation of any transaction in any financial instrument. Please note that such trading analysis is not a reliable indicator of current or future performance as circumstances may change over time. Before making any investment decisions, you should seek advice from an independent financial advisor to ensure you understand the risks.