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Investing.com-- The Australian dollar surged 0.7% on Tuesday following the Reserve Bank of Australia's (RBA) decision to increase interest rates by 25 basis points (bps) to 4.10% on Tuesday, surpassing market expectations. This move marks the second rate hike after a brief pause in April, driving interest rates above 4% for the first time in nearly 12 years.

The RBA cited persistently high inflation levels as the primary reason for the rate increase, warning that further policy tightening may be necessary this year. Recent data revealed that Australian consumer inflation jumped unexpectedly in April, nearing 30-year highs due to elevated housing and fuel prices. Inflation stood at 6.8% for the month, well above the RBA's annual target range of 2% to 3%.

RBA Governor Philip Lowe acknowledged the inflation issue during the announcement, stating that inflation is "still too high" and that elevated prices would inflict more economic damage than a near-term rise in interest rates. Lowe pointed out that while goods price inflation is slowing down, services price inflation remains worryingly high.

The central bank also raised concerns about weak household spending and below-average economic growth in the coming months. Although Australia's labor market showed signs of cooling down in April, unemployment remains near 50-year lows, putting additional upward pressure on inflation.

Despite a stronger-than-expected current account surplus in Q1, an unanticipated drop in Australia's trade surplus could potentially reduce first-quarter GDP by 0.2 percentage points. Nonetheless, the RBA emphasized that "some further tightening of monetary policy may be required" to bring inflation back within its target range – an outcome it anticipates achieving by mid-2025.

The Australian economy is expected to face headwinds in the short term, with first-quarter GDP data set to be released on Wednesday. The RBA's latest interest rate hike underscores the central bank's commitment to addressing inflationary pressures, even as it grapples with potential economic slowdowns.

Disclaimer: This article was generated with the assistance of an artificial intelligence tool.