SYDNEY, Feb 7 Reuters Australia39;s central bank raised its cash rate 25 basis points to a decadehigh of 3.35 on Tuesday and reiterated that further increases would be needed, a more hawkish policy tilt than many had expected.

Wrapping up its February policy meeting, the Reserve Bank of Australia RBA also dropped previous guidance that it was not on a preset path and forecast inflation would only return to the top of its target range of 23 by mid2025.

The Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary, governor Philip Lowe said in a statement.

Markets were surprised by the hawkish tone of the RBA which shattered any expectations of an imminent pause to the tightening campaign. Futures market has priced in a peak rate of 3.9, implying at least two more rate hikes in March and April, compared with 3.75 before the decision.

The local dollar shot up to 0.6940, extending earlier gains. Threeyear government bond yields jumped 15 bps to 3.254 while tenyear yields also surged 15 bps to 3.615.

The surprise was not in the decision, but rather the shift in tone and forward guidance in the Governor39;s Statement, said Gareth Aird, head of Australian economics at CBA, as he updated his call for rates to peak at 3.85 after the decision, compared with 3.35 previously.

This change implies that the RBA Board has essentially made up their…