Australia’s Central Bank Shocks with Huge Cash Rate Hike to Tackle Inflation

The Australian central bank, the Reserve Bank of Australia, has hiked the cash rate by a massive 50 basis points, from 0.35 percent to 0.85 percent, to tackle soaring inflation.

Governor Philip Lowe warned that “further steps” are yet to come as the country battles higher-than-expected inflation

Lowe said the hike was implemented to “assist with the return” of inflation to the two to three percent target range over time.

“Inflation in Australia has increased significantly,” he said in the monetary policy decision.

“While inflation is lower than in most other advanced economies, it is higher than earlier expected.”

The inflation rate is also expected to increase further with supply chain disruptions caused by COVID-19 and the war in Ukraine accounting for much of the increase.

Some domestic factors that have affected prices are the east coast floods, higher prices for electricity and gas, and increases in petrol prices.

The 50 basis point hike exceeded expectations, with most predictions ranging between 25 and 40.

It is the second consecutive cash rate increase after May’s 25 basis point increase, which was the first hike in over a decade in Australia.

Economists unanimously warned that it would be the first of a series of interest rate hikes in order to combat inflation.

On a positive note, Lowe noted that the economy was resilient, growing 0.8 percent in the March quarter and 3.3 percent over the year.

There is also an upswing in business investment and a large pipeline of construction work waiting for completion.

Further, the unemployment rate is at 3.9 percent, the lowest in almost 50 years, and expected to drop further while job ads and vacancies continue to remain at elevated levels.

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“The resilience of the economy and the higher inflation mean that this extraordinary [monetary] support is no longer needed,” Lowe said.

“The board expects to take further steps in the process of normalizing monetary conditions in Australia over the months ahead.”

Prior to the cash rate decision, Treasurer Jim Chalmers said it would be a “difficult” day for homeowners, acknowledging that his prediction of a 0.25 percent hike would worsen the cost of living pressures.

He said it was important to recognize that the trajectory of upwards interest rates had been “set in train” for some time.

“You’ll recall that interest rates went up during the election campaign and when they did the Reserve Bank and the market analysts said that would be the first of a number of interest rate rises,” Chalmers told Sky News Australia.

“Unfortunately, clearly we don’t pre-empt the decisions of the independent Reserve Bank but it is universally expected today that those rates will go up.”

Australian Industry Group said the higher-than-expected increase, while a testament to the strength of the economy, was also a “sober pointer” to the sharp pick up in inflationary pressures.

“It also highlights the risk of further interest rate rises if there is a large increase in the upcoming national wage case decision,” CEO Innes Willox said.

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By Nick R. Hamilton

Nick has a broad background in journalism, business, and technology. He covers news on cryptocurrency, traditional assets, and economic markets.

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