The Reserve Bank of Australia says it will lift its cash rate target by 25 basis points to 0.35%, marking its first rate hike in more than a decade, and a far sharper increase than many economists had predicted.
Reflecting on the results of Tuesday’s board meeting, RBA governor Phillip Lowe said “now was the right time” for the central bank to “begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic”.
That “extraordinary” support includes the RBA’s November 2020 decision to reduce the cash rate target to just 0.10%, a move designed to promote lending and business activity through the coronavirus-induced economic downturn.
As late as October last year, the RBA’s central scenario suggested the economic conditions needed for a rate hike would not be met until 2024.
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But widespread economic resilience, the withdrawal of COVID-19 restrictions, and an unemployment rate of just 4% led many observers to predict a rate hike would come much sooner than the RBA expected.
A sharp spike in living expenses, compounded by supply chain shortages, labour scarcity, and conflict in Ukraine, all but confirmed an imminent cash rate hike.
Last month’s Consumer Price Index showed underlying inflation sat at 3.7% for the March quarter — well above the 2-3% band targeted by RBA policy.
“The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected,” Lowe said Tuesday.
“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.”
Further rate hikes lie ahead, Lowe added, as the RBA fights underlying inflation into its 2-3% target band.
And it will be a tough fight, Lowe conceded. The RBA’s central scenario posits that headline inflation will approach 6% in 2022, while underlying inflation — the central bank’s preferred measurement, and the one it targets — will hit 4.75%.
Those estimations include the impact of cash rate increases.
“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,” he said.
Businesses, homeowners urged to assess their options
A combination of record-low rates and government incentives helped drive business credit from its pandemic-induced slump.
Westpac data shows business credit expanded 9.4% in the year to March, while Commonwealth Bank states financing for equipment and machinery is up 17% so far this financial year, compared to the last.
Today’s decision is set to filter through to much of that bank lending, hiking repayments on variable rate business loans and mortgages across the country.
Darren Stacey, national leader of finance solutions at accounting and advisory firm BDO, says the rate hike should encourage business and personal borrowers alike to consider their options.
Borrowers whose financial position has improved since they took out a loan “may be eligible for a lower interest rate which will offset some of the potential cash rate rises,” Stacey said.
But firms facing tighter operating conditions over the next year should “take action early to address it,” he added.
“If you need more headroom in your loan or your working capital facilities, have that conversation with your bank now before the situation deepens.”