The Australian central bank raises interest rates, warning that more are on the way

The announcement came as a shock to Prime Minister Scott Morrison, who is battling a tough election campaign that, according to surveys, might see him ousted from office on May 21. more info

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

“The Board is determined to doing everything possible to ensure that inflation in Australia returns to target over time,” RBA Governor Philip Lowe said. “I anticipate that additional interest rate rises will be required in the coming months.”

The magnitude of the move boosted the local dollar by 1% to $0.7115, despite the fact that a majority of economists polled by Reuters projected a 0.25% hike. The policy shift occurred as consumer price inflation reached a 20-year high of 5.1% in the first quarter, driven by rising prices for gasoline, housing, food, and education.

For the first time since 2010, core inflation soared to 3.7% and exceeded the RBA’s target band, a dramatic change from recent years when it continuously undershot.

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Markets lowered their expectations for a May hike, despite the fact that many experts believed the RBA would prefer to wait until after the election to see if wage data expected on May 18 confirmed a long-awaited pick-up.

In a press conference, Lowe claimed that the decision was apolitical and had nothing to do with the election.

Futures market rapidly factored in a shift to 0.75% in June, followed by a series of increases to about 2.5% by the end of the year, and 3.5% by the middle of 2023. Given household debt levels at all-time highs, this would be the most vigorous RBA tightening cycle in modern history, putting a damper on consumer purchasing power.

Lowe stated that it was likely that rates would eventually reach 2.5%, while the RBA Board was unsure how quickly the tightening would occur given global uncertainties. The market’s too pessimistic prognosis reflects, in part, the worldwide rush to tighten, with markets betting that the Federal Reserve will rise by 150 basis points by the end of July.

The RBA also stated that it will allow its more than A$350 billion ($249.03 billion) in government bond holdings to mature rather than actively selling them, as some central banks do.

Rising mortgage rates would only exacerbate the rising cost of living constraints that have been a headache for the Liberal National coalition government, which has focused largely on economic management in its campaigning.

According to an ANZ survey released on Tuesday, consumer confidence fell 6.0 percent last week, the largest decrease since an Omicron wave raced through the eastern seaboard in January.

“This is the lowest level of consumer confidence at the start 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.”