The Reserve Bank of Australia (RBA) has raised interest rates by 25 basis points to 0.35%, the first increase in 11 years.
The board judged that now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic.
“The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected,” the RBA said in a statement.
“There is also evidence that 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 market had been expecting a rate rise in May’s meeting following higher-than-expected inflation figures in the March quarter with headline CPI inflation rising to 5.1%, the highest since the introduction of the Goods and Services Tax in 2000.
Governor Philip Lowe said: “The resilience of the Australian economy is particularly evident in the labour market, with the unemployment rate declining over recent months to 4% and labour force participation increasing to a record high.
“Both job vacancies and job ads are also at high levels. The central forecast is for the unemployment rate to decline to around 3.5% by early 2023 and remain around this level thereafter. This would be the lowest rate of unemployment in almost 50 years.”
A rate rise of 15 basis points to 0.25% had been the consensus view amongst economists and was priced by the market, according to HSBC.
Last week AMP chief economist, Shane Oliver, said the RBA had to act today for two reasons.
“First, having a near zero cash rate when unemployment is 4% and inflation is over 5% makes no sense,” he said.
“Second, the experience from the late 1960s and 1970s tells us the longer high inflation persists the more inflation expectations will rise making it even harder to get inflation back down again without engineering a recession. Waiting till after the release of wages data and till after election would have been nice but the stronger broad based surge in inflation means the RBA no longer has time on its side and should move now and do so decisively.”
