Australia’s interest rate decision May 2022

Australia’s consumer price index rose 2.1% for the first quarter of 2022, with food, petrol and other consumer goods prices all rising.

Ian Waldie | Bloomberg | Getty Images

Australia raised interest rates for the first time in more than a decade, a highly anticipated move as consumer prices rise.

Its central bank said on Tuesday that the cash rate would be raised by 25 basis points to 0.35% – the first rate hike since November 2010.

Philip Lowe, governor of the Reserve Bank of Australia, said it was the right time to start pulling some of the “extraordinary monetary support” that was put in place to help the Australian economy during the pandemic.

“The economy has proven resilient and inflation has risen faster and to a higher level than expected,” Lowe said in a statement. “There are also signs that wage growth is picking up. Given this, and the very low interest rates, it is appropriate to start the process of normalizing monetary conditions.”

The increase was more than analysts’ estimate of 15 basis points to 0.25%, according to the median forecast from a Reuters poll of 32 economists.

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Analysts had largely expected the central bank to raise interest rates due to the rapid rise in inflation. Prices of food, gasoline and other consumer goods all rose in the last quarter.

Australia’s consumer price index rose 2.1% in the first quarter, exceeding expectations of a 1.7% rise, data showed last week. On an annual basis, consumer inflation rose by 5.1% – the highest since 2001 and higher than expected to increase by 4.6%.

Lowe acknowledged in his statement that inflation had risen more than expected, although it remains lower than in most other advanced economies.

“This rise in inflation largely reflects global factors. But domestic capacity constraints are increasingly playing a role, and inflationary pressures have become wider, with companies more willing to pass on cost increases to consumer prices,” he said.

A further rise in prices is expected in the short term, but as supply-side disruptions resolve, Lowe said inflation is expected to fall back towards the country’s target range of between 2% and 3%.

The outlook for Australia’s gross domestic product “remains positive” and is expected to grow by 4.25% over 2022 and 2% next year, Lowe said. He noted, however, that there were uncertainties that could hit the global economy, such as the Russia-Ukraine war and Covid disruptions in China.

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