Australia Interest Rate Decision May 2022

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

Ian Waldi | 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.

Its central bank announced on Tuesday that the key rate would be raised by 25 basis points to 0.35%, the first rate hike since November 2010.

Philip Lowe, Governor of the Reserve Bank of Australia, said now is the time to start withdrawing some of the “extraordinary monetary support” put in place to help Australia’s economy during the pandemic.

“The economy proved resilient and inflation rose faster and higher than expected,” Lowe said in a statement. “There is also evidence that wage growth is accelerating. Given this, and the very low level of interest rates, the process of normalizing monetary conditions should begin.”

The rise was 15 basis points higher than analysts’ estimate at 0.25%, according to the median forecast in a Reuters poll of 32 economists.

Shane Oliver, head of investment strategy and chief economist at Australian financial services firm AMP, said the magnitude of the rate hike was above market expectations. He said “the RBA seems to have partly accepted the argument that it had to do something decisive to [to] signal its determination to bring inflation down.”

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Analysts were widely expecting the central bank to hike rates, given the rapidly rising inflation. Prices for food, gasoline and other consumer goods all rose in the last quarter.

Australia’s consumer price index jumped 2.1% in the first quarter, beating expectations for a 1.7% increase, data showed last week. On an annual basis, consumer inflation rose 5.1%, the highest since 2001 and above expectations for a 4.6% increase.

Lowe acknowledged in his statement that inflation has risen more than expected, although it remains lower than most other advanced economies.

“This rise in inflation largely reflects global factors. But domestic capacity constraints are increasingly playing a role and inflationary pressures have widened as companies are more willing to pass on cost increases to prices. consumer,” he said.

Further price increases are expected in the near term, but as supply-side disruptions are resolved, Lowe said inflation should return to the country’s target range of between 2% and 3%.

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

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

“Rate hikes are unlikely to derail the economic recovery just yet, as monetary policy is still very loose, but they will contribute to the slowdown in house prices, where we see house prices falling by 10-15% at the start of 2024,” he said. following the announcement.

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

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