Reserve Bank Governor Philip Lowe announced that he would raise the key rate for the first time in ten years, by 0.25 percentage points, from 0.10% to 0.35%.
Most market economists thought the bank would raise rates, but they were split on whether the bank would start small by raising rates from 0.10% to 0.25%, or go to 0.50% .
The bank appears to have been ripped in the same way and is halfway there.
Rollback to previous tips
The hike comes despite previous statements by the bank that it wanted to wait for the latest payroll data, due in a fortnight (just before the election).
Inflation news last Wednesday, which showed prices rising much faster than expected, forced the bank to reconsider its stance and act quickly to curb.
With so-called ‘trimmed average’ inflation (the RBA’s preferred measure of core inflation) jumping to 3.7% in the March quarter, the bank’s aim to bring inflation back underlying within its target range has been reached.
Indeed, it is now just above the target band.
The only question the Reserve Bank board had to consider was whether inflation was sustainably back in the target range, which he said he would need to see before raising rates.
A sustained price increase is only likely when wages are also rising faster, so the bank initially planned to wait for wage news.
But he says his business outreach program (the regular meetings he has with companies) has told him that companies expect to raise wages by far more than they have so far. present, which means that the official wage growth figures should be on the verge of climbing.
These salary increases are said to be driven by difficulty in finding staff and higher demands from staff given the changing cost of living. Workers may become more inclined to walk away if they don’t get what they want.
Treasury analysis of tax office data finds workers who switch jobs typically get 8-10% wage increases.
The rise in inflation was driven by a series of large, hopefully temporary shocks, including Russia’s invasion of Ukraine, flooding in Australia and COVID lockdowns in China.
We don’t know how long foreign shocks will last, but if they fade quickly, it would take domestic price pressure to make high inflation sustainable.
This is why the announcement of a rise in “non-tradable” inflation (domestically driven) last Wednesday convinced the bank that the current inflation is likely to last.
Non-tradable inflation was 4.2% on the year to March, suggesting that much of Australia’s higher inflation was domestic in origin.
More upcoming hikes
The Reserve Bank never raises rates once. At his press conference, Lowe said it was “not unreasonable” to expect the cash rate to climb to 2.5%.
“How quickly we get there, and if we get there, will be determined by how events unfold,” he added, pointing out that 2.5% is the middle of the bank’s inflation target range. , which means that when the cash rate gets there it will be zero in inflation-adjusted terms, rather than negative as it is now.
Read more: Why the RBA should be soft on interest rate hikes: Inflation may already be receding and going too high risks triggering a recession
The financial markets expect 2.5% by the end of the year. This implies another two percentage points of increases over the next six meetings, which would mean an increase every month for the rest of the year.
Many doubt that rates are rising so high so quickly. However, over the past year, market prices have proven to be more accurate than economists and the Reserve Bank’s own guidance, as the governor conceded during his press conference, calling his guidance a ’embarrassing’.
An increase to 2.5% means an additional $600
“We were told that thousands of Australians would die from the pandemic, that hospitals would be full, that we would have double digit unemployment, maybe 15% unemployment, that deep scars would last for years, maybe decades,” he said, indicating that things had turned out much better than government advisers expected.
If fully passed on, today’s increase will add about $65 to the monthly cost of servicing a $500,000 mortgage. If the cash rate reaches 2.5%, it will be $600 more.
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