The Reserve Bank of Australia has increased the cash rate from 0.1% to 0.35%, with an increase of the interest rate on exchange settlement balances to 25 basis points from 0%.
Reserve Bank governor Philip Lowe said the board believed it was the right time to start pulling back the support it has given to the 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. There is also evidence that wages growth is picking up,” Lowe said.
“Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions.”
Lowe said that the resilience of the Australian economy had been demonstrated by the decline in the unemployment rate to 4%, with job vacancies and job advertisements also at high levels.
He said there is a forecast of unemployment hitting 3.5% by early 2023 and that it will remain at that level for some time.
“The outlook for economic growth in Australia also remains positive, although there are ongoing uncertainties about the global economy arising from the ongoing disruptions from COVID-19, especially in China; the war in Ukraine; and declining consumer purchasing power from higher inflation,” Lowe said.
“The central forecast is for Australian GDP to grow by four and a half per cent over 2022, and two per cent 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.”
Lowe said that inflation is expected to rise even further in the near term than the 5.1% inflation rate reported last week but that it would fall back down to a target rate of between 2% and 3%.
An increase in the cash rate had been the subject of rhetorical barbs exchanged between the two major political parties, with prime minister Scott Morrison saying that an increase in interest rates was not about politics; his political rival, opposition leader Anthony Albanese, said the rate rise means that the coalition’s economic credentials were in doubt.
Morrison told a press conference held after the announcement of the rate rise that Australia had faced a range of challenges during the pandemic and that a range of measures, such as JobKeeper, were implemented to help safeguard the economy.
He said that the position held by the government and the Reserve Bank of Australia were complimentary, as they were designed to help the economy.
The prime minister said that Australians had been preparing for such a change with some people going from variable to fixed interest rates and the government had acted to provide cost-of-living relief in the most recent budget.
Labor said Morrison and treasurer John Frydenberg only had a plan to get them through the election rather than a plan for the economy beyond the election campaign.
Shadow treasurer Jim Chalmers said Australians were now left with skyrocketing inflation, rising interest rates, falling consumer confidence and falling real wages.
“Scott Morrison’s economic credibility was already tattered and now it is completely shredded,” Chalmers said.
“This PM has an excuse for everything and a plan for nothing.”
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