Australia raised its interest rates for the first time in more than a decade, a move that was widely anticipated as consumer prices rose.
Its central bank announced on Tuesday that the cash rate would be raised by 25 basis points to 0.35 percent, the first increase since November 2010.
The Reserve Bank of Australia’s governor, Philip Lowe, stated that the time has come to begin withdrawing some of the “extraordinary monetary support” that was put in place to assist the Australian economy during the pandemic.
“The economy has proven to be resilient, and inflation has increased faster and to a higher level than expected,” Lowe said in a statement. “There is also evidence that wage growth is accelerating.” Given this, as well as the extremely low level of interest rates, it is time to begin the process of normalizing monetary conditions.”
According to the median forecast of 32 economists polled by Reuters, the increase was greater than the analyst estimate of 15 basis points to 0.25 percent.
The scale of the rate increase, according to Shane Oliver, head of investment strategy and chief economist at Australian financial services firm AMP, was greater than market expectations. “The RBA appears to have partly accepted the argument that it needed to do something decisive in order [to] signal its resolve to bring inflation back down,” he said.
Given the rapid rise in inflation, analysts widely expected the central bank to raise rates. Food, gasoline, and other consumer goods prices all rose in the last quarter.
According to data released last week, Australia’s consumer price index increased by 2.1 percent in the first quarter, exceeding expectations of a 1.7 percent increase. Consumer inflation soared to 5.1 percent on an annual basis, the highest since 2001 and higher than the 4.6 percent increase predicted.
In his statement, Lowe acknowledged that inflation had risen faster than expected, despite remaining lower than in most other advanced economies.
“The increase in inflation is primarily due to global factors.” Domestic capacity constraints, on the other hand, are increasingly playing a role, and inflationary pressures have widened, with firms more willing to pass cost increases through to consumer prices,” he said.
Prices are expected to rise further in the near term, but as supply-side disruptions are resolved, inflation is expected to fall back towards the country’s target range of 2 percent to 3 percent, according to Lowe.
The outlook for Australia’s GDP “remains positive,” with the growth of 4.25 percent over 2022 and 2 percent next year, according to Lowe. However, he noted that there were risks to the global economy, such as the Russia-Ukraine conflict and Covid disruptions in China.