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Australia’s central bank raises rates by 50 basis points


The building of the Reserve Bank of Australia in Sydney is seen by many people. To curb consumer price inflation, Australia’s central banks raised its interest rates on May 3, 2022 for the first-time in over a decade.

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Australia’s central banks raised interest rates Tuesday by their highest level in 22 years. They also flagged further tightening as they fight to contain surging inflation. This has sparked a surge of local dollars and stunned markets.

After wrapping up its June policy meeting the Reserve Bank of Australia increased its cash rate 50 basis points (to 0.85%) to correct investors who had been betting on either 25 or 40% increases.

Philip Lowe, RBA Governor, stated in a statement that “Given current inflation pressures and the low interest rates in the economy,” he said.

“The Board anticipates taking further steps to normalize monetary conditions in Australia in the coming months.”

In May, rates were raised by one quarter of a point. This was the first rate increase since 2010. Many had expected it to keep at quarter-point movements. It last raised rates by more than this in 2000.

The local dollar rose 0.4% to $0.7223 thanks to investors, and yields on 3-year bonds surged 16 basis points up to 3.27%. These levels were not possible since the beginning of 2012.

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After the publication of the inflation numbers for the quarter 2, which were expected to be hot, futures prices shifted to the risk of an additional 50 basis points increase in July. Rates will hover around 1.5% in August.

Inflation in consumer prices reached a peak 20 years ago at 5.1% during the first quarter. It could rise to 6% by quarter’s end, given rising energy costs, food and rents, and other factors like home construction and maintenance.

Lowe stated that “higher electricity and petrol prices and recent rises in petrol prices means that inflation is more likely than expected in the immediate term”

Hard winter ahead

Just three weeks into his term, Treasurer Jim Chalmers told Australians that inflation will get worse before it gets better. He also warned them to prepare for an expensive winter.

Chalmers said that some cost-of living relief would be included within the October budget, which was based on child care. In late May’s election, the Labor government defeated the Liberal National coalition. It inherited almost A$1 trillion in debt ($718.70billion) and inexorable budget deficits.

As inflation is expected to rise for longer periods, many investors believe the RBA must raise rates by close to 3% before the end of this year. It will be one of most aggressive tightening campaigns ever recorded.

Most economists were skeptical that interest rates would go up so fast, given that Australian house hunters have A$2 Trillion in mortgage debt. This makes them highly sensitive to borrowing prices.

After a strong run in 2021 and a resounding recovery in Melbourne and Sydney, house prices are already beginning to fall in these cities. Consumer sentiment has returned to its worst state since the pandemic.

Gareth Aird (CBA’s head of Australian economics) stated that “Consumer sentiment was never so low at the start of an RBA tightening cycles.”

He said that it was the first time in a long period of time that house prices had fallen during a cycle. House prices are important. Pushing rates to high in the short term could lead to prices falling sharply, which would ripple through the economy.