As Australia’s central bank attempts to curb inflation before it spirals out of control, the Reserve Bank has announced the largest single increase in the cash rate in 22 years.
The Reserve Bank of Australia (RBA) board raised the cash rate target by 50 basis points to 0.85%, its first back-to-back monthly hike in 12 years, and signals that further tightening will be needed, according to Bloomberg.
The headline consumer price inflation rate was 5.1% for the March quarter, with automotive fuel up 35%, the most since Iraq’s 1990 invasion of Iraq. The current spike in energy prices has similarly been made worse by war after Russian invaded Ukraine in February.
What you should know
- Costs for everything from food to construction materials and energy are already rising for households and businesses. Larger repayment expenses for people on variable loans will be added to this strain, with the major commercial banks certain to pass on today’s rate hike quickly.
- The RBA’s medium-term goal is to have an underlying inflation range between 2% and 3%, compared with a 3.7% pace in the March quarter that’s expected to accelerate in the current quarter if not beyond. Power price increases of 10% or more will kick for many households and businesses from 1 July, a rise that will have knock-on effects
- Despite the imported source of much of the inflation, the RBA sees the need to rein in excessive demand to ensure expectations of further prices don’t lead to a spiral of costs.
- The RBA observed that while home values have fallen in several markets in recent months, they are still more than 25% higher than they were before the outbreak, creating a wealth effect that will underpin spending even as interest rates rise.
- Most central banks are grappling with how to restore interest rates to pre-Covid crisis levels while also limiting price increases without plunging economies into recession.
- Many economies have similar difficulties to Australia’s. The Bank of Canada raised its cash rate by 50 basis points for the second month in a row last week.