Inflation warning: Reserve Bank of Australia surprises market with big rate hike

Governor of the Reserve Bank of Australia Philip Lowe poses for photos on May 3, 2022 in Sydney, Australia.

The Reserve Bank of Australia has surprised the market by lifting its official cash rate - by 50 basis points from 0.35 per cent to 0.85 per cent.

Economists had been evenly split on expectations the cash rate would be lifted either by 25 basis points to 0.6 per cent, or 40 basis to 0.75 per cent.

The RBA's more aggressive stance saw the Aussie dollar rally by almost half a cent against the kiwi.

The kiwi is now worth A89.7c.

Inflation has been lower across the Tasman and that's meant the Reserve Bank of Australia (RBA) has been much slower to start lifting interest rates.

Annual Consumer Price Index inflation currently sits at 5.1 per cent - compared to 6.9 per cent in New Zealand.

Last month the RBA increased interest rates for the first time in more than 11 years, with a 25-basis-point hike taking the cash rate target to 0.35 per cent.

In contrast the RBNZ started lifting rates last October and has already hiked the OCR from its record low of 0.25 per cent to 2 per cent.

"While inflation is lower than in most other advanced economies, it is higher than earlier expected," said RBA Governor Philip Lowe.

"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."