Reserve Bank of Australia reveals surprising interest rate hike

ROCKETING inflation appears to have forced the Reserve Bank’s hand with Governor Philip Lowe revealing a surprising 25 basis point rate hike to 0.35 per cent.

The RBA board on Tuesday afternoon was overwhelmingly tipped to announce its first rate rise in 12 years and set the stage for several hikes over the coming months as it weans the economy off emergency policy settings it has enjoyed for 18 months. The case for a rate rise has intensified in recent weeks as conflict in Eastern Europe and ongoing Covid disruptions exacerbate existing supply chain pressures, sending consumer prices soaring.

Mr Lowe said “now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic”.

“The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected,” he explained.

“There is also evidence that wages growth is picking up. Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions.

“Both job vacancies and job ads are also at high levels.

“The central forecast is for the unemployment rate to decline to around 3½ per cent by early 2023 and remain around this level thereafter. This would be the lowest rate of unemployment in almost 50 years.”

While noting that “the outlook for economic growth in Australia also remains positive”, Dr Lowe said there were “ongoing uncertainties” about the global economy rising due to the Covid pandemic, the war in Ukraine and “declining consumer purchasing power from higher inflation”.

Dr Lowe also gave an ominous hint at things to come.

“The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time. This will require a further lift in interest rates over the period ahead,” he said.

“The Board will continue to closely monitor the incoming information and evolving balance of risks as it determines the timing and extent of future interest rate increases.”

Many market watchers had called on the RBA to prove its ‘political impartiality’ by increasing borrowing costs regardless of whether it will hurt Prime Minister Scott Morrison and his campaign to sell himself as the best leader for the nation’s hip pocket.