The Reserve Bank of Australia (RBA) has delivered a heavy blow to Scott Morrison’s economic credibility, raising interest rates for the first time since 2010 and the first time in an election campaign since 2007.
The RBA has lifted rates by 0.25%, to 0.35%, saying “now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic”.
The increase in rates — once not expected until 2024 — was driven by last week’s shock 5.1% March quarter inflation result, and the persistent increase in inflation over the past two quarters.
RBA governor Philip Lowe said in his post-meeting statement that “inflation has picked up significantly … This rise in inflation largely reflects global factors. But domestic capacity constraints are increasingly playing a role and inflation pressures have broadened, with firms more prepared to pass through cost increases to consumer prices. A further rise in inflation is expected in the near term”.
The bank expects worse inflation to come, warning that it sees “headline inflation of around 6% and underlying inflation of around 4.75%; by mid 2024, headline and underlying inflation are forecast to have moderated to around 3%”.
The decision is seriously damaging for Morrison, who has insisted his government is best placed to manage the economy despite real wage falls in recent quarters as wage growth failed to take off and prices rose. Now households with mortgages face the first of what is likely to be a year or more of interest rate increases — something no mortgage holder has seen since Julia Gillard was prime minister.
While insisting that he is not responsible for inflation and interest rate increases — claiming yesterday that interest rates were above politics and nothing to do with him — Morrison has presided over three successive budgets of massive stimulus spending; his most recent budget, in March, projected deficits from now til the mid-2030s.
Australia now joins most of the developed world in lifting rates in response to surging prices, with rate increases expected to continue until the cash rate has returned to 1.5%-2%. Lowe concluded his statement by warning “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 lift in interest rates over the period ahead”.
Mortgage holders face an extended period of rising repayments, further adding to pressure on household budgets.
