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RBA makes first rate hike in over a decade

 

The Reserve Bank of Australia (RBA) has announced a 25-basis point increase to the official cash rate, signalling the end of a decade-long cutting cycle.

3 May 2022 

During a meeting on Tuesday, 3 May, the RBA board decided to increase the cash rate target by 25 basis points to 35 basis points. It also increased the interest rate on Exchange Settlement balances from 0% to 25 basis points.

“The board judged that 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 RBA said. 

“The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected. There is also evidence that wage 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.”

The RBA said its central forecast was for Australian GDP to grow by 4.25% over 2022 and 2% over 2023.

“Household and business balance sheets are generally in good shape, an upswing in business investment is underway and there is a large pipeline of construction work to be completed,” the central bank said. 

“Macroeconomic policy settings remain supportive of growth and national income is being boosted by higher commodity prices.”

The RBA observed that inflation has picked up significantly and by more than expected, although it remains lower than in most other advanced economies. Over the year to the March quarter, headline inflation was 5.1% and in underlying terms inflation was 3.7%. 

The Australian Chamber of Commerce and Industry (ACCI) warned of rising prices back in December 2021, when it released its latest ACCI-Westpac Survey of Industrial Trends. 

In the December quarter, input cost pressures remained elevated, with a net 38% of firms reporting higher input costs. The sustained period of cost pressures over the past previous three quarters, at a net 39%, was the highest average level since December 2008

“Cost inflation has been a significant issue throughout the COVID pandemic and recovery, with supply chain disruptions globally and domestically, border closures, and a tight labour market all viewed as contributing factors,” the ACCI said. 

Following Tuesday’s rate hike, the RBA stated that it was committed to doing what was necessary to ensure the inflation in Australia returned to target over time. 

“This will require a further lift in interest rates over the period ahead. 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,” the bank concluded.

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