The Reserve Bank of Australia has raised the official cash interest rate by 0.25% to 0.35%.
It is the first increase in 11 years, in response to accelerated annual inflation of 5.1%. RBA Governor Philip Lowe signaled more rate hikes in response to continued inflationary pressures over the next two years. Markets are now expecting another surge in June.
In response to the economic impact of lockdowns and layoffs due to the Covid-19 pandemic, the cash rate was cut to a record low of 0.1% in 2020.
The Central Bank also raised interest rates on Exchange Settlement balances from 0% to 25 basis points.
At today’s meeting, the Board of Directors decided to raise the target for the spot interest rate by 25 basis points to 35 basis points. It also raised interest rates on Exchange Settlement balances from zero percent to 25 basis points — https://t.co/3AwR8dmJSi
— RBA (@RBAInfo) May 3, 2022
If banks pass the full increase on to borrowers, it would add about $50 a month to a $500,000 mortgage.
For an average $600,000 mortgage, a 0.25% interest rate increase would add $1,500 in annual interest expense to the mortgage.
Governor Lowe said the RBA board has decided the economy is more resilient and inflation has risen faster and higher than expected, adding that they also saw evidence that wage growth is picking up. In view of this, and given the very low level of interest rates, it is appropriate to initiate the process of normalization of monetary conditions.
“The resilience of the Australian economy is particularly evident in the labor market, where unemployment has fallen to 4 percent in recent months and the employment rate has risen to an all-time high,” he said.
“Also, both vacancies and vacancies are at a high level. The central forecast is that unemployment will fall to around 3½ percent in early 2023 and remain around this level thereafter. This would be the lowest unemployment rate in nearly 50 years.”
Lowe said the outlook for economic growth in Australia also remains positive, despite lingering uncertainties such as the ongoing Covid problems in China and the war in Ukraine.
The central forecast is that Australian GDP will grow by 4.25% in 2022 and 2% in 2023.
“Household and business balance sheets are generally in good shape, business investment is picking up and a major pipeline of construction work needs to be completed,” Lowe said.
Macroeconomic policy institutions continue to support growth and national incomes are boosted by higher commodity prices.
In the near term, inflation is expected to pick up further before returning to the RBA target of 2-3%.
The RBA expects headline inflation to reach around 6% in 2022, with underlying inflation at around 4¾%, before declining to around 3% by mid-2024 – subject to projections based on an assumption of further increases in interest rates.
Lowe said the Governing Council is “committed to doing what is necessary” to bring inflation back to the Bank’s target level and that “a further increase in interest rates will be necessary in the coming period”.
The Central Bank will focus its attention on the wage price index data to be released by the ABS on May 18.