BusinessAustralia's interest rate decision May 2022

Australia’s interest rate decision May 2022

Australia’s consumer price index jumped 2.1% for the March quarter in 2022, with prices of food, petrol and other consumer goods all surging.

Ian Waldie | Bloomberg | Getty Images

Australia hiked its interest rate for the first time in more than a decade, a widely expected move as consumer prices surge.

Its central bank said Tuesday that the cash rate will be increased by 25 basis points to 0.35% — the first rate hike since November 2010.

Philip Lowe, governor of the Reserve Bank of Australia, said it is 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 said in a statement. “There is also evidence that wages growth is picking up. Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions.”

The hike was more than the analyst estimate for 15 basis points to 0.25%, according to the median forecast of a Reuters poll of 32 economists.

Shane Oliver, head of investment strategy and chief economist at Australian financial services firm AMP, said the scale of the rate increase was above market expectations. He said “the RBA appears to have partly accepted the argument that it had to do something decisive in order [to] signal its resolve to get inflation back down.”

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Analysts had widely expected the central bank to hike rates, given the rapid rise in inflation. Prices of food, petrol and other consumer goods were all up in the last quarter.

Australia’s consumer price index jumped 2.1% for the first quarter, exceeding expectations of a 1.7% increase, data showed last week. On an annual basis, consumer inflation rocketed 5.1% — the highest since 2001 and higher than expectations for a 4.6% increase.

Lowe acknowledged in his statement that inflation had picked up more than expected, though it remains lower than in most other advanced economies.

“This rise in inflation largely reflects global factors. But domestic capacity constraints are increasingly playing a role and inflation pressures have broadened, with firms more prepared to pass through cost increases to consumer prices,” he said.

A further increase in prices is expected in the near term, but as supply side disruptions are resolved, Lowe said inflation is expected to decline back toward the country’s target range of between 2% to 3%.

The outlook for Australia’s gross domestic product also “remains positive” and is forecast to grow by 4.25% over 2022 and 2% next year, Lowe said. However, he noted there were uncertainties that may hit the global economy, such as the Russia-Ukraine war and Covid disruptions in China.

AMP’s Oliver said he expects the cash rate to rise to 1.5% by year end and to 2% by the middle of next year.

“Rate hikes are unlikely to de-rail the economic recovery just yet as monetary policy is still very easy, but they will add to the slowdown in home prices, where we see dwelling prices falling 10 to 15% into early 2024,” he said following the announcement.

“Banks are likely to pass the RBA’s rate hike on in full to their variable rate customers and deposit rates will also start to rise,” Oliver added.

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