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.
Saeed Khan | AFP | beautiful pictures
Australia’s central bank on Tuesday raised interest rates by the most in 22 years and marked further tightening in the near-term as the country battles to contain rising inflation that has stunned markets and sent shock waves through the air. local dollar soars.
At the end of its June policy meeting, the Reserve Bank of Australia (RBA) raised the cash rate by 50 basis points to 0.85%, the mistake of investors who had bet on the 25 or 40 level. base point.
“With inflationary pressures present in the economy and interest rates still very low, the Council decided to raise 50 basis points today,” RBA Governor Philip Lowe said in a statement.
“The Council is expected to take further steps in the process of normalizing monetary conditions in Australia in the coming months.”
The central bank raised interest rates by a quarter in May, the first hike since 2010, and many had thought it would stick to the quarter-cut moves. The last time it increased more was in early 2000.
Investors sent the domestic dollar up 0.4% to $0.7223, while the yield on the 3-year bond rose 16 basis points to 3.27% and levels not seen since early 2012.
Futures move into real prices with a 50 basis point increase in risk in July and around 1.5% in August after the release of inflation figures for the second quarter, expected to very hot.
Consumer price inflation hit a 20-year high of 5.1% in the first quarter and could hit 6% this quarter amid rising energy, food, rent and housing costs.
“Higher electricity and gas prices and recent increases in gasoline prices mean that, in the short term, inflation is likely to be higher than expected a month ago,” Lowe warned.
Tough winter ahead
In just his third week in office, Treasurer Jim Chalmers has warned Australian inflation will get worse before it gets better and must brace for a “difficult and costly” winter.
Chalmers promised some cost-of-living relief to be included in the budget due in October, with a focus on childcare and health. The Labor Government overthrew the Liberal National coalition in an election at the end of May, inheriting almost A$1 trillion ($718.70 billion) in debt and an endless budget deficit.
With inflation looking set to continue at high levels for the long term, investors are betting the RBA will have to hike rates to nearly 3% by year-end making it easily one of the more tightening campaigns. The most powerful on record.
Most economists had doubted interest rates would soar as home-hunting Australians are saddled with A$2 trillion in mortgage debt, making them highly sensitive to borrowing costs.
House prices have already begun to fall in Sydney and Melbourne after a spike in 2021, and consumer sentiment is returning to the depths of the pandemic.
“Consumer sentiment has never been this low at the start of the RBA tightening cycle,” noted Gareth Aird, head of Australian economics at the CBA.
“This is also the first time home prices have fallen at the start of a cycle, and home prices are still important,” he added. “Pushing interest rates too high too quickly risks a sharp lower correction in the near term, which could hurt the economy.”
