June 30, 2022

Australia’s interest rate decision May 2022

Australia’s consumer price index rose 2.1% in the March 2022 quarter, driven by higher prices for food, petrol and other consumer goods.

Ian Valdy | Bloomberg | Getty Images

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

The central bank said on Tuesday that the cash rate would increase by 25 basis points to 0.35% – the first rate increase since November 2010.

Philip Lowe, Governor of the Reserve Bank of Australia, said it was time to begin withdrawing some of the “extraordinary cash support” that had been put in place to help the Australian economy during the epidemic.

“The economy has proven to be resilient and inflation is rising faster than expected,” Lowe said in a statement. “There is also evidence that wage growth is increasing. In view of this and the very low interest rates, it is appropriate to begin the process of normalizing monetary conditions.”

According to a Reuters poll of 32 economists, the increase was 0.25% above the analyst’s estimate for 15 basis points.

Shane Oliver, chief economist and head of investment strategy at Australian financial services firm AMP, said the scale of the rate hike exceeded market expectations. He said, “The RBA seems to have partially accepted the argument that something has to be done decisively. [to] It represents its commitment to reversing inflation. “

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Given the rapid rise in inflation, analysts widely expected the central bank to raise rates. Prices of food, petrol and other consumer goods have all risen in the last quarter.

Australia’s consumer price index rose 2.1% in the first quarter, surpassing expectations of a 1.7% increase, according to data released last week. On an annual basis, consumer inflation rose to 5.1% – the highest since 2001 and 4.6% higher than expected.

Lowe acknowledged in a statement that inflation was higher than expected, although it was lower than other advanced economies.

“This increase in inflation reflects global factors. But as domestic capacity restraints play an increasing role and inflationary pressures widen, companies are more willing to pass on cost increases to consumer prices,” he said.

Prices are expected to rise further, but as supply side barriers are resolved, inflation will fall back to the country’s target range of 2% to 3%, Low said.

Australia’s GDP outlook is also “positive” and is projected to grow by 4.25% over 2022 and 2% next year, Low said. However, he noted that there are uncertainties that could affect the world economy, such as the Russia-Ukraine war and the Govt crisis in China.

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

“As monetary policy becomes easier, rate hikes are unlikely to slow the economic recovery, but they will add to the recession in housing prices, where we see housing prices falling by 10 to 15% by the beginning of 2024,” he said. Following the announcement.

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