The Reserve Bank of Australia (RBA) yesterday lifted its benchmark interest rate for the first time in more than 11 years. The cash rate rose from 0.1 percent to 0.35 percent in a move potentially damaging to a government that is seeking re-election on May 21.
A rate increase was widely expected after official data released last week showed that Australia’s inflation rose to 5.1 percent in the year through March. It is the highest annual rate since 2001, when a newly introduced 10 percent federal consumption tax created a temporary spike.
Inflation last quarter was sharply higher than the 3.5 percent three months earlier. The March result was driven by a surge in fuel and housing costs, as well as food shortages created by recent Australian floods.
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The central bank adjusts interest rates to keep inflation within a 2 to 3 percent target band. RBA Governor Philip Lowe said inflation had increased more than been expected, but remained lower than in most advanced economies.
“The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected,” Lowe said.
“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 normalizing monetary conditions,” Lowe said.
The cash rate had been at a record-low 0.1 percent since November 2020.
Lowe said at the time that the rate could remain that low until 2024, despite COVID-19 pandemic-induced inflation.
The bank last increased interest rates in November 2010. The cash rate then rose a quarter of a percentage point to 4.75 percent.
It is the first time that the bank, whose independence of government was enshrined in legislation in 1996, has shifted interest rates during a federal election campaign since 2007.
Two weeks after the benchmark rate rose by a quarter of a percentage point to 6.75 percent in November 2007, then-Australian prime minister John Howard’s conservative government was voted out of office after more than 11 years in power. Howard apologized for the rise and said he had sympathy for mortgage holders.
Australian Prime Minister Scott Morrison’s conservative government is seeking a rare fourth three-year term at elections on May 21.
Morrison rejected a journalist’s suggestion that the rate hike would cost his government the election.
He said his government had already helped Australians cope with rising costs in March by temporarily halving the tax on gasoline at a cost of A$3 billion (US$2.1 billion). The government had also provided millions of low and middle-income earners with tax offsets and so-called Cost of Living Payments at a cost of A$8 billion.
“I sympathize with Australians as they face high cost of living pressures. I sympathize with Australians when they face higher repayments on their home,” Morrison said.
“When you look around the world, there are few places that people would rather be than right here in Australia and the reason for that is the way that we’ve steered this country through one of our most difficult times,” he added.
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