RBA hikes interest rates by 0.25%, flags more rises

The Reserve Bank of Australia has hiked the official cash interest rate by 0.25% to 0.35%.

It’s the first increase in 11 years, in response to an accelerated annual inflation rate of 5.1%. RBA Governor Philip Lowe flagged more rate rises in response to ongoing inflation pressures over the next two years. Markets are now expecting another increase in June.

The cash rate was cut to a record low of 0.1% in 2020 in response to the economic impact of lockdowns and layoffs due to the Covid-19 pandemic.

The Central Bank also increased the interest rate on Exchange Settlement balances from 0% to 25 basis points.

At its meeting today, the Board decided to increase the cash rate target by 25 basis points to 35 basis points. It also increased the interest rate on Exchange Settlement balances from zero per cent to 25 basis points – https://t.co/3AwR8dmJSi

— RBA (@RBAInfo) May 3, 2022

If banks pass on the full increase to borrowers, it would add around $50 a month to a $500,000 home loan.

For an average mortgage of $600,000 a 0.25% rate rise would add $1,500 in annual interest charges to the mortgage.

Governor Lowe said the RBA board decide the economy was more resilient and inflation has picked up more quickly, and to a higher level, than expected, adding that they also saw evidence of wages growth is picking up. Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions.

“The resilience of the Australian economy is particularly evident in the labour market, with the unemployment rate declining over recent months to 4 per cent and labour force participation increasing to a record high,” he said.

“Both job vacancies and job ads are also at high levels. The central forecast is for the unemployment rate to decline to around 3½ per cent by early 2023 and remain around this level thereafter. This would be the lowest rate of unemployment in almost 50 years.”

Lowe said the outlook for economic growth in Australia also remains positive, despite ongoing uncertainties such as China’s ongoing Covid problems and the war in Ukraine.

The central forecast is for Australian GDP to grow by 4.25% over 2022 and 2% over 2023.

“Household and business balance sheets are generally in good shape, an upswing in business investment is underway and there is a large pipeline of construction work to be completed,” Lowe said.

Macroeconomic policy settings remain supportive of growth and national income is being boosted by higher commodity prices.

A further rise in inflation is expected in the near term, before returning to the RBA’s target range of 2-3%.

The RBA expects headline inflation to hit around 6% in 2022 with underlying inflation of around 4¾%, before falling to around 3% in mid 2024 – adding the caveat that the forecasts are based on an assumption of further increases in interest rates.

Lowe said the Board “is committed to doing what is necessary” to return inflation to the Bank’s target level and that “will require a further lift in interest rates over the period ahead”.

The Central Bank will turn its attention to wage price index data due to be released by the ABS on May 18.