Australian interest rate decision in May 2022

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

Its central bank said Tuesday that its cash rate will rise by 25 basis points to 0.35% – the first rate increase since November 2010.

Reserve Bank of Australia Governor Philip Lowe said it was a good time to start withdrawing some of the “extraordinary monetary support” that has been put in place to help the Australian economy during the pandemic.

“The economy has proven resilient and inflation has rebounded more quickly and to a higher level than expected,” Lowe said in a statement. “There is also evidence that wage growth is recovering. Given this, and the very low level of interest rates, it is appropriate to begin the process of monetary normalization.”

The increase was larger than analysts’ estimates of 15 basis points, to 0.25 percent, 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. “It appears that the Reserve Bank of Australia has partially accepted the argument that it has to do something crucial in order,” he said [to] It indicates its intention to bring down inflation again.”

Analysts had widely expected the central bank to raise interest rates in light of the rapid rise in inflation. Prices of food, gasoline, and other consumer goods rose in the last quarter.

Data last week showed that Australian CPI jumped 2.1% for the first quarter, beating expectations for a 1.7% increase. On an annual basis, consumer inflation jumped 5.1% – the highest level since 2001 and above expectations for a 4.6% increase.

Lowe admitted in his statement that inflation has rebounded more than expected, although it is still lower than most other advanced economies.

“This rise in inflation largely reflects global factors. But constraints on domestic capacity are playing an increasing role and inflation pressures have widened, as companies are more willing to pass on higher costs to consumer prices,” he said.

Another price increase is expected in the near term, but as the supply-side turmoil resolves, Lowe said inflation is expected to fall back toward the country’s target range of 2% to 3%.

Lowe said the outlook for Australian GDP “remains positive” and is expected to grow by 4.25% through 2022 and 2% next year. However, he noted that there are uncertainties that may hit the global economy, such as the Russia-Ukrainian war and the Covid unrest in China.

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

“It is unlikely that an interest rate increase will wipe out the economic recovery yet because monetary policy is still too easy, but it will add to the slowdown in home prices, as we see home prices fall by 10-15% in early 2024,” he said. after advertising.

“Banks are likely to pass the RBA rate hike in full to their floating rate clients, and deposit rates will also start to rise,” Oliver added.