The RBA has thrown markets a curve ball with a rate rise bigger than anybody predicted

Here we have Shock and Orr. In Australia we now have Lowe going High. The Reserve Bank of Australia (RBA) has increased its official interest rate, the cash rate target to 0.85% from 0.35%.

The 50 basis point rise is much bigger than any economists predicted, with most expectations for a 25 basis point rise, though some, notably ANZ and Westpac expected 40. Nobody went for 50.

The Australian dollar immediately surged in reaction. The New Zealand dollar lost close to half a cent against the Aussie in the immediate aftermath. And perhaps more weakness can be expected in the short term. The kiwi was a A89.8c on the cross rate a short while ago.

It's the second rise from Australia's central bank in as many months (the last one being 25 basis points) and comes as it plays catch-up with this side of the Tasman.

The RBA is well behind its counterpart the Reserve Bank of New Zealand in beginning a hiking cycle for interest rates. The RBNZ began lifting its Official Cash rate from a then emergency setting of 0.25% in October last year and the OCR's now 2.0%, with another likely 50 point rise coming next month.

It should be stressed that 50 point rises in official interest rates are very unusual and just serve to highlight the very unusual circumstances in the world as central banks cope from switching from emergency low-interest pandemic support mode into fighting fast rising inflation.

RBA Governor Philip Lowe said: "Given the current inflation pressures in the economy, and the still very low level of interest rates, the Board decided to move by 50 basis points today.

"The Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead. The size and timing of future interest rate increases will be guided by the incoming data and the Board's assessment of the outlook for inflation and the labour market.

"The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time."

This is the RBA statement:

At its meeting today, the Board decided to increase the cash rate target by 50 basis points to 85 basis points. It also increased the interest rate on Exchange Settlement balances by 50 basis points to 75 basis points.

Inflation in Australia has increased significantly. While inflation is lower than in most other advanced economies, it is higher than earlier expected. Global factors, including COVID-related disruptions to supply chains and the war in Ukraine, account for much of this increase in inflation. But domestic factors are playing a role too, with capacity constraints in some sectors and the tight labour market contributing to the upward pressure on prices. The floods earlier this year have also affected some prices.

Inflation is expected to increase further, but then decline back towards the 2–3 per cent range next year. Higher prices for electricity and gas and recent increases in petrol prices mean that, in the near term, inflation is likely to be higher than was expected a month ago. As the global supply-side problems are resolved and commodity prices stabilise, even if at a high level, inflation is expected to moderate. Today's increase in interest rates will assist with the return of inflation to target over time.

The Australian economy is resilient, growing by 0.8 per cent in the March quarter and 3.3 per cent over the year. Household and business balance sheets are generally in good shape, an upswing in business investment is underway and there is a large pipeline of construction work to be completed. Macroeconomic policy settings are supportive of growth and national income is being boosted by higher commodity prices. The terms of trade are at a record high.

The labour market is also strong. Employment has grown significantly and the unemployment rate is 3.9 per cent, which is the lowest rate in almost 50 years. Job vacancies and job ads are at high levels and a further decline in unemployment and underemployment is expected. The Bank's business liaison program continues to point to a lift in wages growth from the low rates of recent years as firms compete for staff in a tight labour market.

One source of uncertainty about the economic outlook is how household spending evolves, given the increasing pressure on Australian households' budgets from higher inflation. Interest rates are also increasing. Housing prices have declined in some markets over recent months but remain more than 25 per cent higher than prior to the pandemic, supporting household wealth and spending. The household saving rate also remains higher than it was before the pandemic and many households have built up large financial buffers. While the central scenario is for strong household consumption growth this year, the Board will be paying close attention to these various influences on consumption as it assesses the appropriate setting of monetary policy.

The Board will also be paying close attention to the global outlook, which remains clouded by the war in Ukraine and its effect on the prices for energy and agricultural commodities. Real household incomes are under pressure in many economies and financial conditions are tightening, as central banks withdraw monetary policy support in response to broad-based inflation. There are also ongoing uncertainties related to COVID, especially in China.

Today's increase in interest rates by the Board is a further step in the withdrawal of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic. The resilience of the economy and the higher inflation mean that this extraordinary support is no longer needed. Given the current inflation pressures in the economy, and the still very low level of interest rates, the Board decided to move by 50 basis points today. The Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead. The size and timing of future interest rate increases will be guided by the incoming data and the Board's assessment of the outlook for inflation and the labour market. The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.