The Reserve Bank of Australia has shocked financial markets and borrowers by lifting the cash rate target by 0.25 percentage points to 3.85 per cent.
It comes as Qantas has announced Vanessa Hudson as its new chief executive, to replace Alan Joyce when he leaves the airline at the end of the year.
Look back on the day's events as they happened with our blog.
Disclaimer: this blog is not intended as investment advice.
Key events
Live updates
Here's how trading ended for the day
By Kate Ainsworth
Better late than never — thanks for bearing with us.
- ASX 200 : -0.9% to 7,267 points
- All Ords: -0.9% at 7,459 points
- Australian dollar: +1.2% at 67.03 US cents (at 5:30pm)
- Dow Jones: -0.1% to 34,051 points
- S&P 500: -0.04% to 4,167 points
- Spot gold: flat at $US1,983.00/ounce
- Brent crude: +0.5% at $US79.74/barrel
- Iron ore: -0.1% to $US101.90 a tonne
- Bitcoin: +1.5% at $US28,070
That's where we'll leave today's blog
By Kate Ainsworth
Thanks so much for following along throughout what turned out to be a mammoth business news day.
But there's more to come — tonight we'll hear from RBA governor Philip Lowe who is speaking at a board dinner in Perth and will be taking questions, which will likely revolve around today's surprise rate hike.
To keep up-to-date when that happens (9:20pm AEST, or 7:20pm in the west) you can download the ABC News app and subscribe to our range of news alerts for the latest news.
We'll be back to do it all again bright and early tomorrow.
ASX plummets to three-week low after RBA hikes rates
By Kate Ainsworth
The Australian share market has plummeted to finish at its lowest level in more than three weeks, after the RBA announced a surprise 11th rate hike in the past 12 months.
The ASX200 finished down 67.2 points, or 0.92% at 7,267.
All sectors finished in the red, with the real estate sector shedding the most, down -2.1%.
The biggest gains of the day went to:
- Pinnacle Investment +6.1%
- Cleanaway Waste Management +5.8%
- Lake Resources +5.65
- Telix Pharmaceuticals +3.1%
- Graincorp +2.2%
The bottom five worst performers for the day were:
- Computershare -4.8%
- Mirvac -4.2%
- Imugene -3.9%
- De Grey Mining -3.75
- Bellevue Gold -3.6%
Watch: Treasurer says rate hike proof inflation is main economic challenge
By Kate Ainsworth
Treasurer Jim Chalmers has just responded to the RBA's decision to lift interest rates, and foreshadowed some measures to ease the cost of living in next week's federal budget.
Thank you!
By Gareth Hutchens
Okay everyone, I'm sorry but I have to go now.
Thanks for sending me your questions. I'm really sorry I couldn't get to all of them. There were a lot today.
And best of luck, Natty.
Declining rates for savers
By Gareth Hutchens
Gareth, we are retirees and for some years our savings behave been earning tiny amounts of interest. So I suppose one might say that it will be our turn for a little while. If one looks at Australia’s interest rates over the last 40 years, interest rates have rarely been below 5% pa.
- Miles
I have complete sympathy for you Miles.
In the inflation-targeting era (since the early 1990s), interest rates have been in long-term decline - except for now.
It's been increasingly great for asset owners. But people who rely on interest rates from their savings to supplement their income have not benefited.
Governments are happy for the focus to be on the RBA
By Gareth Hutchens
Governments are getting off far too lightly re their contribution to this problem. Even now various Budgets are promising relief for low/middle income and mortgaged households - fair enough. But if this in not immediately countered by a tax hit to middle/high and home owning households the net impact on the economy (i.e. demand) is clearly going to be positive. Completely at odds with what the RBA is trying to acheive...
- Mike
There's a good point in here.
Governments have got off too lightly for contributing to this inflation. The RBA has become a scapegoat of sorts.
Your point about the budget is also interesting. There are credible forecasts at the moment that the Albanese Government could actually deliver an exceptionally-thin budget surplus next week.
That's for a few reasons, but especially because commodity prices have been far higher than Treasury was forecasting, and because the exceptionally-high levels of immigration we're seeing out the moment are much higher than were forecast.
And budget surpluses help to suck inflation out of the system.
So on the surface, the budget settings look like they may be supporting the RBA's attempt to dampen inflation.
But that's only on the surface. The budget will probably show that there will be a heap of structural problems down the line that will be hard to address.
Is it a cop-out?
By Gareth Hutchens
Given that this period of rapid inflation is reported to have been affected by high corporate profits rather than wages, why is the RBA so focused on slowing/preventing wage growth? To someone who doesn't know a lot about economics, it almost feels like they're taking the easy way out trying to keep the big companies happy.
- Bec
The RBA can't do much about supply.
It can only influence demand (in the short and medium term) by moving interest rates up and down.
That's why the RBA is always keeping an eye on wages because wages feed into demand-driven inflation.
This is just the system past policymakers built.
In the inflation-targeting era, it's been the RBA's job to manage inflation - and the economic cycle - by moving interest rates around to influence demand.
A legitimate question
By Gareth Hutchens
Just a bit puzzled as to who these "savers" are that today's rise is meant to be good news for...
- Craig
Many people would love to have some savings set aside that could generate interest.
Inflation and recessions
By Gareth Hutchens
Hi just wondering if there is any historical data that's shows how high previous inflation rates were when they actually triggered a recession or a recessionary curve. As a baby boomer who lived through interest rates of 12% and higher 30 years ago, current inflation seems not high at all
- Bill
A significant difference with today's environment, compared to past eras, is the level of debt in the economy.
When my folks bought their first home in the early 1970s it cost them $35,000. That was 3x their annual income.
Today, properties are typically worth upwards of 7x annual income, and well above 10x to 12x in some of our capital cities.
And because the cash rate was 0.1% for a time, the size of the recent mortgages banks were willing to extend to people were huge.
So, relatively small increases in interest rates are much more impactful today.
Now, this might be a slightly left-field way of answering your question quickly, but I recently made a graph of the time when Australia's economic authorities experimented with targeting the money supply to control inflation (at the peak of Milton Friedman's monetarism craze in the late 1970s and early 1980s).
It was when Malcolm Fraser was prime minister and John Howard was Treasurer (for most of the time).
There were three recessions in that period, including the recession in the early 1980s which was especially bad.
It shows how high inflation was in that era. Note inflation fell after each recession.
Although, inflation shot up again in 1985, after the Hawke Government floated the dollar in 1983 and deregulated the financial sector.
Good news for savers
By Gareth Hutchens
How about reporting on the Australians for whom today’s decision is good news - the savers?
- David Howey
Depending on how much of the rate increase will be passed onto savers (if at all), it is good news for savers.
Puzzled. Befuddled. Bemused.
By Gareth Hutchens
Alan Oster, NAB's chief economist, says he's finding it difficult to understand the RBA board's behaviour lately.
He spoke to my colleague David Chau earlier, and he had this to say about today's rate hike and the accompanying statement from governor Phil Lowe.
Q: "Recent property market data for Canberra showed house prices are on their way up again. Is the wealth effect something the RBA may be concerned about? Especially if house prices continue their recovery? People might feel they are better off economically and might spend more, which might make it harder for the Reserve Bank to bring inflation down?
Alan Oster:
"That is possible. But let's face it. It is mainly a Sydney thing. Up over 1% in Sydney and across Australia, 0.5%.
"Yes, there is a wealth effect associated, but also a very direct interest-rate effect. It is much bigger than the wealth effect. The nice news is these are probably bottoming out. But the fact that the economy is still going to slow I think is an issue.
"Once again the Reserve Bank made it very difficult for us all to understand what the hell they are talking about, to be brutally honest," he said.
Help the ABC investigate mortgage lending
By Gareth Hutchens
Our investigations team would like your help.
Today’s hike will increase the pressure on borrowers who took out large loans while rates were at historic lows.
ABC Investigations has launched a crowdsourced investigation into mortgage lending in Australia.
They’re investigating how we got into this situation, who is to blame and what needs to change – and they need your help.
If you have a mortgage, or if you work in lending, regulation or financial support services, they want to hear from you.
Go to abc.net.au/lending to share your story.
Rate hike 'likely to be the last', CoreLogic says
By Kate Ainsworth
CoreLogic's research director, Tim Lawless thinks today's rate hike will be the last of this cycle.
He says today's interest rate decision was always going to be a "line ball", but "the 25 basis point lift is likely to be the last in what has been the most rapid rate hiking cycle on record".
"Although inflation has been trending lower since peaking in the December quarter 2022, today’s rate hike reflects the RBA’s uncertainty about how ‘sticky’ inflation might be amid persistently tight labour markets and new evidence that housing prices have moved through their low point," Mr Lawless said.
"Although the RBA didn’t touch on the recent more positive housing trend, the statement following the meeting highlighted the rapid drop in housing prices since rate hikes commenced could be a factor in slowing household spending (alongside high interest rates and high cost of living pressures).
"Time will tell whether the latest rate hike is enough to send the recent positive trend in home values into reverse, however our anticipation is the market will continue to level out on the expectation that interest rates have peaked and the imbalance between housing demand and supply will persist for some time yet."
Rates rises until...
By Gareth Hutchens
Given the RBA’s comment that they expect inflation to reduce to 3% by mid-2025 (upper bound of the target range) are we likely to see ongoing rate hikes until then?
- Vickie
Economists say it would be reasonable to expect rates to rise a little more this year, but I haven't seen anyone suggest that rates will keep rising until mid-2025.
There are still hundreds of thousands of households with fixed-rate mortgages that have yet to roll onto variable loans. When they do, they'll be getting a big interest rate shock.
The RBA's aware of that. It knows there's a lag between rate hikes and their impact on economic activity, and it's expecting inflation to slowly fall over the next 24 months as the rate rises that have already occurred work their way through the system.
Why aren't banks passing on higher interest rates to savers?
By Gareth Hutchens
As a retired person with extremely limited funds, I want the banks to be forced to pass on more of the interest rate rises to people like me. They seem to unfairly hit both savers and borrowers, and just make more profit.
- Ros
Hi Ros, we published an article on this issue last month from Peter Martin from the Conversation.
I've posted the link below.
But here's an excerpt from the piece with a very good graph that could explain your situation:
The RBA's focus on demand and wages
By Gareth Hutchens
Am I understanding this correctly? Is the policy really to keep wage growth down?
- Sean
Central banks say they can only control demand. They have no control over supply.
So when they move interest rates up and down, they're trying to manipulate demand. Wages are one of the key drivers of demand, and employment (and unemployment) drives wages.
The RBA knows this inflationary episode didn't start with exceptionally-strong wages growth. But it's very concerned that workers will demand (and start winning) wage growth to match this high inflation because that could spark a "wage-price spiral," which would, in turn, make it even harder for the RBA to get this inflation back down and under control.
So, the RBA doesn't want wages to grow too quickly. It wants them to stay relatively subdued and for these high prices to eventually wash out of the system, so everything can go back to normal.
More rate hikes, and a recipe for an economic slowdown
By Gareth Hutchens
Here are some comments from Callam Pickering, an economist at global job site Indeed.
Mr Pickering is a former RBA economist so he has insight into how RBA officials would be thinking about things.
He's just put out this note on the rate decision, which I think is worth quoting in full:
"The flow of recent economic data provides a compelling case for further rate hikes,” he said.
"While it was also possible to mount a convincing argument for no change, the RBA clearly felt that economic conditions remained too strong to facilitate a sustainable return to its 2-3% inflation target within a reasonable time-frame.
"The RBA anticipates that further rate hikes may well be needed to defeat the current inflation outbreak. However, given that rate hikes hit the Australian economy with a considerable lag, the RBA is also mindful that the economy hasn’t yet felt the full impact of the first rate hikes let alone the ones that followed. That points towards a pretty measured and cautious approach over the next three to six months.
"The key challenge for the RBA is balancing the risks of high inflation against the likelihood that excess tightening plunges the economy into a recession or severe downturn which harms Australian workers and businesses unnecessarily. There is plenty of anecdotal evidence of households doing it rough but so far that hasn’t translated into any meaningful moderation in household or business spending.
"While there were signs of inflation moderating in the monthly figures, sources of domestically-driven inflation remained too strong. Prices of non-tradable goods - a useful proxy for inflation driven by domestic factors - have increased at an annualised pace of 8.1% over the past six months. It won’t be possible for inflation to sustainably return to its 2-3% target unless that number gets down to the high 3% or low 4% range.
"Unfortunately, achieving that requires you to squash domestic demand for goods and services. That normally means higher unemployment, reduced household spending and business investment."
"That said, we anticipate that the Australian economy will slow considerably over the second half of the year. This is centered on the belief that household conditions will deteriorate due to the combination of much higher mortgage repayments, softish asset prices and the unprecedented decline in inflation-adjusted wages. This is a recipe for an economic slowdown if ever I’ve seen one.
"While the May increase will come as an unwelcome surprise to many, we don’t anticipate that rates will continue to rise for long.
"We are very close to rates reaching the cycle peak and that will likely become clear over the next three to six months.”
Decision to lift interest rates a 'big surprise' for NAB's chief economist
By Kate Ainsworth
It was the less likely outcome, but the RBA choosing to lift the cash rate today has come as a surprise to many people — including NAB's chief economist Alan Oster.
He was on ABC News Channel as the announcement was made, and he said the decision to hike rates was a "big surprise".
Real wages are still declining
By Gareth Hutchens
I definitely am not getting more wages, I am getting more work but certainly not more money. Everything has increased so my wage is going backwards. Yet no one is stepping in to rein in price gouging for the sake of gouging. Supermarket chains posting record profits, is this serious? Really disappointed.
- Jess
You're not alone Jess. We've had a few comments like this. People are hurting.
