Australia's Central Bank Hikes Rates to Control Soaring Inflation

Australia's Central Bank Hikes Rates to Control Soaring Inflation
A pedestrian walks past the Reserve Bank of Australia (RBA) head office in Sydney, Australia, on March 1, 2022. (AAP Image/Bianca De Marchi)
Rebecca Zhu

The Reserve Bank of Australia, the country's central bank, has increased the cash rate by a massive 50 basis points, from 0.35 percent to 0.85 percent, with “further steps” to come.

Governor Philip Lowe said the hike came in response to higher-than-expected inflation to “assist with the return” of inflation to the two to three percent target range over time.

“Inflation in Australia has increased significantly. While inflation is lower than in most other advanced economies, it is higher than earlier expected,” he said in the monetary policy decision.

The inflation rate is also expected to increase further with supply chain disruptions caused by COVID-19 and the war in Ukraine accounting for much of the increase.

Some domestic factors that have affected prices are the east coast floods, higher prices for electricity and gas, and increases in petrol prices.

The 50 basis point hike exceeded expectations, with most predictions ranging between 25 and 40.

It is the second consecutive cash rate increase after May’s 25 basis point increase, which was the first hike in over a decade in Australia.

Economists unanimously warned that it would be the first of a series of interest rate hikes in order to combat inflation.

 A ‘SOLD’ sticker is seen on a sale sign in front of a house in Canberra, Australia, May 18, 2021. (AAP Image/Lukas Coch)
A ‘SOLD’ sticker is seen on a sale sign in front of a house in Canberra, Australia, May 18, 2021. (AAP Image/Lukas Coch)

On a positive note, Lowe noted that the economy was resilient, growing 0.8 percent in the March quarter and 3.3 percent over the year.

There is also an upswing in business investment and a large pipeline of construction work waiting for completion.

Further, the unemployment rate is at 3.9 percent, the lowest in almost 50 years, and expected to drop further while job ads and vacancies continue to remain at elevated levels.

“The resilience of the economy and the higher inflation mean that this extraordinary [monetary] support is no longer needed,” Lowe said.

“The board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead.”

Prior to the cash rate decision, Treasurer Jim Chalmers said it would be a “difficult” day for homeowners, acknowledging that his prediction of a 0.25 percent hike would worsen cost of living pressures.

He said it was important to recognise that the trajectory of upwards interest rates had been “set in train” for some time.

“You’ll recall that interest rates went up during the election campaign and when they did the Reserve Bank and the market analysts said that would be the first of a number of interest rate rises,” Chalmers told Sky News Australia.

“Unfortunately, clearly we don’t pre-empt the decisions of the independent Reserve Bank but it is universally expected today that those rates will go up.”

Australian Industry Group said the higher-than-expected increase, while a testament to the strength of the economy, was also a “sober pointer” to the sharp pick up in inflationary pressures.

“It also highlights the risk of further interest rate rises if there is a large increase in the upcoming national wage case decision,” CEO Innes Willox said.