Australian shares ended a three-day rally on Tuesday, slumping about 1% after the country’s central bank surprised markets with a 25 basis point (bp) interest rate hike when most traders had positioned themselves for a pause.

The S&P/ASX 200 index dropped 1.2% to close at 7,129.60.

The benchmark ended 1% higher on Monday.

The Reserve Bank of Australia (RBA) raised interest rates by a quarter-point, taking the cash rate to an 11-year high of 4.1% and hinted at further monetary policy tightening to ensure that inflation returns to target in a reasonable timeframe.

Markets had been leaning towards a pause, although they had priced in a sizeable 40% chance that the RBA would hike by 25 bps.

“The RBA pointed to upside risks with inflation in its statement, and with the monthly CPI reading picking up to 6.8%, the central bank is yet to see a clear downtrend in inflation,” eToro AUS Capital market analyst Josh Gilbert said.

The first-quarter economic growth figures are due on Wednesday, and are expected to show growth eased to a quarterly gain of 0.3%, according to analysts, from 0.5% earlier.

Miners boost Australian shares, eyes on RBA rate decision

“Elevated inflation and higher interest rates will have likely dampened household demand, which will likely weigh on growth,” said Gilbert.

On the bright side, data showed the country’s current account surplus widened in the March quarter, helped by strong exports of resources and travel services.

Financials led declines on the bourse, slipping 1.5%, with all the ‘big four’ lenders trading in red.

Separately, bourse operator ASX Ltd dipped 10.2% to be the biggest laggard on the benchmark index, after it lifted its capital expenditure outlook for fiscal 2024 and revised its dividend payout ratio policy.

New Zealand’s benchmark S&P/NZX 50 index fell 0.1% to close at 11,864.12.