EconomyAustralia raises interest rates to tame inflation ahead of...

Australia raises interest rates to tame inflation ahead of polls

Australia has raised interest rates for the first time in 11 years just three weeks before a general election that is largely being fought over the rising cost of living.

The Reserve Bank of Australia increased the cash rate, the benchmark interest rate, to 0.35 per cent from 0.1 per cent to stem the rising tide of inflation that hit 5.1 per cent in the 12 months to March.

The 25 basis point increase was more aggressive than some analysts had expected. It was also the first time the RBA has raised the borrowing rate in an election campaign since 2007, when John Howard, the three-term prime minister, lost to Kevin Rudd.

The increase, even from a historically low rate, has forced Prime Minister Scott Morrison to defend his record of economic management — his main weapon in the election campaign — as the cost of living has risen sharply.

In Geelong this week, Morrison argued that a rise in interest rates should not be viewed as a political event as the RBA was independent of the government.

He then took a swipe at Anthony Albanese, leader of the opposition Labor party, who could not say what the cash rate was at the start of the campaign. “At least I know what it is,” said Morrison, whose Liberal-National coalition government is trailing in the polls.

The rise indicated that the RBA was moving away from emergency settings, including interest rate cuts, introduced to help steer the economy through the coronavirus pandemic.

Philip Lowe, RBA governor, said on Tuesday: “The board judged that now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic. The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected.”

Lowe warned there could be further interest rate rises as inflation was predicted to hit 6 per cent this year. “The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time. This will require a further lift in interest rates over the period ahead,” he said.

Speaking at a press conference, Lowe added that the central bank would focus on normalising interest rates after the pandemic. “It’s not unreasonable to expect the normalisation of interest rates over the period ahead could see interest rates rise to 2.5 per cent,” he said.

Jim Chalmers, shadow treasurer, said that Morrison’s economic credibility was “in tatters”, with rates rising in an uncertain economic environment. “This is the third wave of Scott Morrison’s cost-of-living crisis. This is a triple whammy of falling real wages, skyrocketing inflation and interest rates are about to rise,” he said.

Tim Lawless, a director at CoreLogic, a property research firm, said that Australian house prices had surged 27 per cent while the cash rate was at an emergency level, but the market would lose steam when rates rose.

“By lifting the cash rate during an election month, the RBA has sent a clear message it will make decisions based on its mandate and not be swayed by the political cycle,” Lawless said.

Inflation has been driven by rising petrol, housing and food costs, which piled pressure on the RBA to lift interest rates after months of expectation that it would follow in the footsteps of central banks in New Zealand, the UK and the US.

Josh Frydenberg, treasurer, highlighted the resilience of the economy and falling unemployment. “We don’t have an axe to grind with the Reserve Bank. They are independent,” he said. “These are global factors driving up inflation.”

The rising cost of living and concerns over the prospect of higher rates has hit consumer confidence, which plunged 6 per cent last week, according to economists at ANZ Bank. Signs of a sharp slowdown in the housing market have also emerged.

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