Australia raises interest rates to tame inflation ahead of election

Australia raised interest rates for the first time in 11 years just three weeks before a hotly contested general election because of rising living costs.

The Reserve Bank of Australia raised the cash rate, the benchmark interest rate, from 0.1% to 0.35% to stem the rising tide of inflation which reached 5.1% over the past 12 months ending March.

The 25 basis point increase was more aggressive than some analysts had expected. It was also the first time the RBA raised the borrowing rate during an election campaign since 2007, when John Howard, the three-term prime minister, lost to Kevin Rudd.

The increase, even from a historically low rate, has forced Prime Minister Scott Morrison to defend his economic management record – his main weapon in the election campaign – as the cost of living has risen sharply.

In Geelong this week, Morrison argued that an interest rate hike should not be seen as a political event because the RBA was independent of the government.

He then took a swipe at Anthony Albanese, leader of the opposition Labor Party, who could not say what the exchange rate was at the start of the campaign. “At least I know what it is,” said Morrison, whose Liberal-National coalition government is trailing in the polls.

The rise signaled the RBA was moving away from emergency parameters, including interest rate cuts, introduced to help steer the economy through the coronavirus pandemic.

Philip Lowe, Governor of the RBA, said on Tuesday: “The Board felt the time was right to start withdrawing some of the extraordinary monetary support that has been put in place to help the Australian economy during the pandemic. . The economy proved resilient and inflation rose faster and higher than expected.

Lowe warned that there could be further interest rate hikes as inflation is expected to hit 6% this year. “The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time. This will require a further rise in interest rates over the coming period,” he said.

Speaking at a press conference, Lowe added that the central bank would focus on normalizing interest rates after the pandemic. “It is not unreasonable to expect that the normalization of interest rates over the coming period will push interest rates up to 2.5%,” he said.

Jim Chalmers, shadow treasurer, said Morrison’s economic credibility was “in tatters”, with rates rising in an uncertain economic environment. “This is the third wave of Scott Morrison’s cost of living crisis. It’s a triple whammy of falling real wages, skyrocketing inflation and interest rates that are about to rise,” he said.

Tim Lawless, director of CoreLogic, a property research firm, said Australian house prices jumped 27% as the cash rate was at an emergency level, but the market would lose steam when the rates would increase.

“By raising the exchange rate during an election month, the RBA has sent a clear message that it will make decisions based on its mandate and will not be influenced by the political cycle,” Lawless said.

Inflation was fueled by rising petrol, housing and food prices, which put pressure on the RBA to raise interest rates after months of waiting for it to would follow in the footsteps of the central banks of New Zealand, the United Kingdom and the United States.

Josh Frydenberg, Treasurer, highlighted the resilience of the economy and the drop in unemployment. “We have nothing to do with the Reserve Bank. They are independent,” he said. “These are global factors that drive up inflation. »

Rising costs of living and concerns over the prospect of a rate hike have hit consumer confidence, which plunged 6% last week, according to economists at ANZ Bank. Signs of a sharp slowdown in the housing market have also emerged.

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