RBA lifts rates just weeks out from election

The Reserve Bank has lifted the official interest rate to 0.35 per cent less than three weeks before a federal election focused on cost-of-living pressures and flagged more to come.

Following its May board meeting on Tuesday afternoon, RBA governor Philip Lowe confirmed a 0.25 percentage point increase.

While a rate rise was widely expected, most experts predicted a far more modest increase of 15 basis points.

It is the first rate rise in 11 years, since November 2010 and is a desperate attempt to clamp down on skyrocketing inflation, which has reached an annual rate of 5.1 per cent and has sent prices climbing at the fastest rate in two decades.

It is also the first rate rise during an election campaign since 2007, when John Howard lost out to Kevin Rudd.

The nation’s cash rate has been sitting at the historic low of 0.1 since 2020, when it was slashed in response to the COVID-19 crisis.

The Board judged that 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 economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected. There is also evidence that wages growth is picking up. Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions.

The resilience of the Australian economy is particularly evident in the labour market, with the unemployment rate declining over recent months to 4 per cent and labour force participation increasing to a record high. Both job vacancies and job ads are also at high levels. The central forecast is for the unemployment rate to decline to around 3½ per cent by early 2023 and remain around this level thereafter. This would be the lowest rate of unemployment in almost 50 years.

The RBA 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. The Board will continue to closely monitor the incoming information and evolving balance of risks as it determines the timing and extent of future interest rate increases.