Australia’s central bank hikes interest rates

As it winds down huge monetary stimulus, Australia’s central bank lifted its cash rate by a surprise significant 25 basis points to 0.35 percent on Tuesday, the first hike in nearly a decade, and hinted at more to come.

The announcement came as a shock to Prime Minister Scott Morrison, who is in the midst of a bruising election campaign that, according to surveys, might see him voted out on May 21.

The Reserve Bank of Australia (RBA) concluded its May policy meeting by saying it was the correct time to begin reducing exceptional monetary assistance because inflation had increased sufficiently and the economy was approaching full employment.

RBA Governor Philip Lowe stated, “The Board is determined to doing what is required to ensure that inflation in Australia returns to target over time.” “I believe that more interest rate hikes will be required in the months ahead.”

The magnitude of the move boosted the local currency by 1% to $0.7115, despite the fact that a majority of analysts polled in the media projected only a 0.25 percent increase.

Consumer price inflation soared to a 20-year high of 5.1 percent in the first quarter, driven by rising expenses for gasoline, housing, food, and education.

For the first time since 2010, core inflation increased to 3.7 percent, above the RBA’s target range for the first time, a dramatic change from prior years when it routinely undershot.

Even while many experts anticipated the RBA would prefer to wait until after the election and see if wages data expected on May 18 would confirm a long-awaited pick up, markets narrowed the chances on an increase in May as a result of the hot report.

Lowe stressed during a press conference that the election had no bearing on the decision, which he described as apolitical.

Futures rapidly pricing in a 0.75 percent rise in June, followed by a series of hikes to about 2.5 percent by the end of the year, and 3.5 percent by the middle of 2023.

Given household debt levels at all-time highs, this would be the most forceful RBA tightening cycle in modern history, putting a constraint on consumer purchasing power.

Lowe said it was reasonable to expect rates to rise to 2.5 percent over time, while the RBA Board was keeping an open mind about how quickly rates would rise given global uncertainty.

The market’s hawkish forecast reflects the worldwide rush to tighten, with markets betting that the Federal Reserve would raise rates by 150 basis points by the end of July on its own.

The RBA also declared that, unlike several central banks, it will allow its more than A$350 billion ($249.03 billion) in government bond holdings mature rather than actively sell them.

Rising mortgage rates will exacerbate rising cost-of-living pressures, which are already causing problems for the Liberal National coalition government, which is campaigning hard on economic management.

Consumer confidence dropped 6.0 percent last week, according to an ANZ poll released on Tuesday, the worst dip since an Omicron wave swept through the eastern seaboard in January.

“This is the lowest level of consumer confidence at the beginning of a tightening cycle since the inflation targeting regime began in the early 1990s,” said David Plank, ANZ’s head of Australian economics.

“As a result, the RBA may tighten more slowly than the market anticipates.”

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