People walk past the Reserve Bank of Australia building in Sydney. On May 3, 2022, Australia’s central bank raised interest rates for the first time in more than a decade to curb soaring consumer prices.
Said Khan | AFP | Getty Images
Australia’s central bank on Tuesday raised interest rates to the most in 22 years and signaled tightening ahead as it struggles to contain soaring inflation, stun markets and send the the local dollar.
Following its June policy meeting, the Reserve Bank of Australia (RBA) raised its key rate by 50 basis points to 0.85%, misleading investors who had bet on a move of 25 or 40 basis points.
“Given the current inflationary pressures in the economy and the still very low level of interest rates, the Board has decided to move 50 basis points today,” RBA Governor Philip Lowe said. , in a press release.
“The Council expects to take further steps in the process of normalizing monetary conditions in Australia in the months ahead.”
The central bank had already raised rates by a quarter-point in May, the first hike since 2010, and many believed it would stick to quarter-point moves. The last time it rose more was in early 2000.
Investors sent the local dollar up 0.4% to $0.7223, while three-year bond yields jumped 16 basis points to 3.27% and levels not seen since the start of the month. 2012.
Futures priced in the real risk of another 50 basis point hike in July and rates of around 1.5% in August after the release of inflation figures for the second quarter, which should be hot.
Consumer price inflation hit a 20-year high of 5.1% in the first quarter and could well approach 6% this quarter due to rising costs for energy, food, rent and residential construction.
“Higher electricity and gas prices and recent increases in petrol prices mean that in the short term inflation is likely to be higher than forecast a month ago,” warned Lowe.
Hard winter ahead
In his third week in office, Treasurer Jim Chalmers warned Australian inflation would get worse before it gets better and brace for a “difficult and costly” winter.
Chalmers promised cost-of-living relief would be included in a budget due in October, centered on childcare and health. The Labor government ousted the National Liberal coalition in an election in late May, inheriting nearly A$1 trillion ($718.70 billion) in debt and endless budget deficits.
With inflation looking set to stay elevated for longer, investors are betting that the RBA will have to hike rates to nearly 3% by the end of the year, easily making this one of the most aggressive tightening campaigns around. never recorded.
Most economists doubted rates would rise that far given that Australians looking for homes are sitting on A$2 trillion in mortgage debt, making them highly sensitive to borrowing costs.
House prices have already started to fall in Sydney and Melbourne after a blistering run in 2021, and consumer sentiment is back in the depths of the pandemic.
“Consumer sentiment has never been so low at the start of an RBA tightening cycle,” noted Gareth Aird, head of the Australian economy at the CBA.
“It was also the first time that house prices fell at the start of a cycle, and house prices matter,” he added. “Pushing rates too high too quickly runs the risk of prices correcting sharply lower in the near term, which would have a ripple effect on the economy.”