RBA Raises Cash Rate By 25bps; First Hike Since Nov 2010, More to Come

By Sophia Rodrigues

(Sydney, May 3, 2022)—The Reserve Bank of Australia raised the cash rate by 25 basis points to 0.35%, marking the first interest rate hike since November 2010 and the beginning of normalising monetary conditions.

The rate rise was in response to higher-than-expected inflation and following evidence that labor costs are increasing more quickly. The resilience of the domestic economy, low unemployment and strong economic growth also added to the RBA’s judgement that it was time to begin withdrawing some of the extraordinary monetary support put in place during the Covid-19 pandemic.

The RBA also announced its plan for Quantitative Tightening, saying it will not reinvest the proceeds of its bond holdings as they mature.

The “resilience of the economy means that the record low interest rates are no longer needed,” Governor Philip Lowe said in a speech Tuesday following the announcement of the board decision.

The RBA said the main drivers of the higher inflation have been global developments, with a series of major supply shocks pushing prices up. But there was a domestic component too, as strong demand is putting pressure on available capacity and leading to a broadening of inflation pressures.

The RBA said its business liaison suggests that wages growth has been picking up, with an increasing number of firms paying higher wages to attract and retain staff.

“While aggregate wages growth was subdued during 2021 and no higher than it was prior to the pandemic, the more timely evidence from liaison and business surveys is that larger wage increases are now occurring in many private-sector firms,” it added.

The RBA expects further increase in inflation with central forecast for headline inflation in 2022 of 6%, and around 4.75% for underlying inflation. By mid-2024, the RBA expects headline and underlying inflation to moderate to around 3%, but this is conditional on an assumption of further increases in interest rates.

The RBA said a further lift in interest rates will be required over the period ahead.

--Contact: sophia@centralbankintel.com