Australia’s central bank hikes rates by 50 basis points

People walk past the Reserve Bank of Australia building in Sydney. On May 3, 2022, the Reserve Bank of Australia hiked interest rates for the first time in more than a decade to curb rising consumer prices.

Said Khan | AFP | Getty Images

Australia’s central bank hiked interest rates by the highest rate in 22 years on Tuesday, announcing further tightening as it struggles to stem rising inflation, numb markets and boost the local dollar.

At the conclusion of its June meeting, the Reserve Bank of Australia (RBA) hiked its policy rate by 50 basis points to 0.85%, misleading investors who had been betting on a move of either 25 or 40 basis points.

“Given the current inflationary pressures in the economy and still very low interest rates, the board decided today to hike 50 basis points,” RBA Governor Philip Lowe said in a statement.

“The Board expects to take further steps in the process of normalizing monetary conditions in Australia over the coming months.”

The central bank had already hiked interest rates by a quarter-point in May, the first since 2010, and many had thought it would stick to the quarter-point hike. The last time it had wandered by more was in early 2000.

Investors pushed the local dollar up 0.4% to $0.7223, while three-year bond yields rose 16 basis points to 3.27%, a level not seen since early 2012.

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Futures have priced in the real risk of another 50 basis point hike in July and yields are around 1.5% through August after the release of second quarter inflation figures which are expected to be red-hot.

CPI inflation hit a 20-year high of 5.1% in the first quarter and could well approach 6% this quarter given rising energy, food, rent and housing costs.

“Higher electricity and gas prices and recent increases in petrol prices mean inflation is likely to be higher in the near term than was expected a month ago,” Lowe warned.

A harsh winter is ahead

In just his third week in office, Treasurer Jim Chalmers warned Australians inflation would get worse before it improved and prepare for a “difficult and expensive” winter.

Chalmers pledged to include some living cost relief in a budget due in October focused on childcare and health. The Labor government ousted the Liberal National Coalition in a late May election, inheriting nearly A$1 trillion ($718.70 billion) in debt and endless budget deficits.

With inflation likely to remain high for much longer, investors are betting the RBA will have to hike rates to nearly 3% by the end of the year, making it easily one of the most aggressive tightening campaigns on record.

Most economists had doubted interest rates would rise as much as Australians looking to find homes have A$2 trillion in mortgage debt, making them very sensitive to borrowing costs.

Home prices in Sydney and Melbourne have already started falling after a stellar run in 2021 and consumer sentiment is back in the depths of the pandemic.

“Consumer sentiment has never been this low at the start of an RBA tightening cycle,” noted Gareth Aird, CBA’s head of Australia’s economy.

“It was also the first time house prices have fallen at the start of a cycle and house prices matter,” he added. “If interest rates are pushed too high too quickly, there is a risk that prices will be revised down sharply in the short term, which would affect the economy.”

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