Australia's economy grew at a faster pace than expected in the second quarter, reinforcing expectations that the Reserve Bank of Australia (RBA) will continue raising interest rates to combat persistent inflation. Official data released on Thursday showed gross domestic product (GDP) increased by 0.4% from April to June, exceeding economists’ forecasts of a 0.3% gain. On an annual basis, the economy expanded 2.1%, above the median estimate of 1.8%.
The stronger-than-anticipated growth indicates the economy remains resilient despite the RBA’s efforts to cool inflation through a series of rate hikes earlier in the year. The central bank has kept the cash rate steady at 4.35% in the past two meetings after raising it three times between February and May.
“The economy risks not slowing quickly enough for the Reserve Bank of Australia to achieve its inflation objectives,” said Alex Joiner, chief economist at IFM Investors. Joiner added that this could prompt additional rate increases in either September or November.
Following the GDP release, Australian government bond yields surged, with the three-year note yield rising by as much as 11 basis points to 4.83%, reaching levels unseen since March. Ten-year bond yields also climbed to their highest since July 2011. The moves reflected traders adjusting rate hike expectations, with markets pricing in a strong likelihood of a September increase and more than an 80% chance of further tightening in the first quarter of next year, up from 62% prior to the data.
Robert Thompson, head of economics and rates strategy at Royal Bank of Canada’s Australian division, noted that while some components of the spending data are complex, the overall GDP beat led markets to accelerate the sell-off in bonds amid a broader global trend. “This seems way overdone,” Thompson said, cautioning that momentum from global market moves is difficult to counter.
The GDP figures come amid ongoing global uncertainty driven by geopolitical tensions and inflationary pressures. Notably, the report covers a period overlapping with the Middle East conflict, which has contributed to a global energy shock and increased inflation concerns worldwide. Hostilities between the United States, Israel, and Iran have recently escalated, intensifying instability.
Australia’s Treasurer, Jim Chalmers, described the GDP result as “robust” given the challenging international environment. He highlighted that Australia’s annual growth outpaced most major advanced economies, matching the United States and exceeding peers in other regions.
The RBA’s inflation target is to achieve a midpoint of 2.5% within a band of 2% to 3%, a level not reached for approximately five years. Recent inflation data and this GDP report suggest the central bank faces continued pressure to tighten monetary policy in upcoming meetings, including the scheduled September 28-29 deliberations.