RBA lifts rates by 25bps to combat rising inflation

  • By Zilla Efrat

The Reserve Bank of Australia yesterday lifted interest rates for the first time since November 2010, but only by 25 basis points to 0.35 per cent, which was lower than some economists expected.

The central bank, however, warned that further rate rises would be necessary to ensure that inflation returned to target over time.

“The RBA hawkishly pivoted away from its long-held neutral guidance,” said Citi Australia’s chief economist, Josh Williamson.

“Along with delivering a 25 basis point hike to an unconventional level of 35 basis points, the RBA sounded more like the super hawkish Reserve Bank of New Zealand in saying that it is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”

Last month, the RBNZ increased its official cash rate by 0.5 per cent to 1.5 per cent, its biggest hike in 22 years, on concerns that inflation was getting out of control.

In addition to lifting rates, the RBA also decided to not reinvest the proceeds of its government bond holdings as they mature.

“These decisions reflect a judgement by the board that it is now time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic,” said RBA Governor Philip Lowe.

“Two considerations are particularly relevant here. The first is that the economy has been very resilient, unemployment is low and economic growth is expected to be strong this year. The second is that inflation has picked up more quickly, and to a higher level, than was expected and there is evidence that labour costs are increasing more quickly.”

Over the year to the March quarter, CPI inflation was 5.1 per cent and in underlying terms, inflation was 3.7 per cent. The RBA’s central forecast for 2022 is for headline inflation of around 6 per cent and underlying inflation of around 4¾ per cent.

The RBA stated that while some of the inflationary pressures stemmed from global factors, domestic capacity constraints were increasingly playing a role and inflation pressures had broadened, with businesses more prepared to pass through cost increases to consumer prices.

CoreLogic research director Tim Lawless observed: “An upwards move was anticipated, given soaring inflation, but the timing and magnitude of the lift is likely to be regarded as controversial, given the looming federal election.

“By lifting the cash rate during an election month, the RBA has sent a clear message it will make decisions based on its mandate and not be swayed by the political cycle.”

Lawless noted that although inflation had broken out of the target range, there had been some speculation the RBA would wait for confirmation of wages growth, via the ABS Wage Price Index, which is released later this month, before raising the cash rate. 

“Clearly, there was enough indirect evidence of wages growth from the RBA’s business liaison program to make a move on the cash rate without the ‘official’ update on wage costs,” he said.

Craig James, chief economist at CommSec, said: “While bad news for borrowers, an increase in interest rates represents good news for the nation’s depositors. And certainly, more Australians have been squirrelling away cash over the past few years.

“Deposits from households stood at a record $1,261.6 billion in March, up by 12.3 per cent on a year ago. Aussie families have accumulated $272.4 billion worth of savings during the pandemic.

But Lawless said: “Higher interest rates are set to add to the downwards pressure on housing growth rates, which were already losing steam or, as in the case of Sydney and Melbourne, trending into negative territory due to factors including affordability constraints, higher fixed-term mortgage rates and lower levels of consumer sentiment.

“As the cash rate normalises, we can expect housing markets to lose further momentum.  A higher cash rate implies higher variable mortgage rates, a reduction in borrowing capacity and tighter serviceability assessments for prospective borrowers.

“Past research from the RBA has pointed to ‘high end’ housing markets with higher investor concentrations being more sensitive to changes in interest rates in the short term. This may be why Sydney and Melbourne markets are already seeing price declines, with more affordable housing markets expected to eventually follow the downward trend.”