Sydney, June 7 (BNA): Australia’s central bank on Tuesday raised interest rates by the most in 22 years and announced further tightening ahead as it grapples with spiraling inflation, dazed markets and pushed the local dollar higher.
At the conclusion of the June policy meeting, the Reserve Bank of Australia (RBA) raised its cash rate by 50 basis points to 0.85%, which is the fault of investors who bet on a move of either 25 or 40 basis points, Reuters reports.
“Given the current inflation pressures in the economy, and the level of interest rates still very low, the board has decided to move 50 basis points today,” RBA Governor Philip Lowe said in a statement.
“The Board expects to take further steps in the process of monetary normalization in Australia in the coming months.”
The central bank had already raised interest rates by a quarter point in May, the first increase since 2010, and many believed it would stick with quarter point moves. The last time it rose further was in the early 2000s.
Investors sent the local dollar up 0.4% to $0.7223, while three-year bond yields rose 16 basis points to 3.27%, levels not seen since early 2012.
Futures have shifted in price with the real risk of another 50 basis point rise in July and rates around 1.5% by August after the release of second-quarter inflation numbers, which are expected to be very risky.
Consumer price inflation hit a 20-year peak at 5.1% in the first quarter and could approach 6% this quarter amid rising costs for energy, food, rent and home construction.
Lowe warned that “high electricity and gas prices and recent increases in gasoline prices mean that inflation in the near term is likely to be higher than expected a month ago.”
Difficult winter ahead
In his third week in office, Treasurer Jim Chalmers warned that Australian inflation will get worse before it improves and prepares for a “difficult and expensive” winter.
Chalmers promised to include some cost-of-living relief in the October budget, which focuses on child care and health.
The Labor government ousted the National Liberal Coalition in a late May election, inheriting nearly a trillion Australian dollars ($718.70 billion) in debt and endless budget deficits.
With inflation expected to stay elevated for much longer, investors are betting that the Reserve Bank of Australia will have to raise interest rates to nearly 3% by the end of the year, easily making it one of the most severe tightening campaigns ever.
Most economists doubted rates would go up that far as home-hunting Australians are sitting on $2 trillion in mortgage debt making them highly sensitive to borrowing costs.
House prices are already starting to fall in Sydney and Melbourne after a great wave in 2021, and consumer sentiment has returned to the depths of the pandemic.
Gareth Aird, CBA’s head of Australian economics, noted that “consumer sentiment has never been this low at the start of the RBA tightening cycle”.
He added that this is the first time that house prices have fallen at the beginning of a cycle and house prices are important. “Pushing prices too high too quickly risks a sharp price correction downward in the near term which will have a ripple effect through the economy.”