By Michael Janda and Emilia Terzon
The Australian Reserve Bank has increased interest rates for the first time in more than 11 years, with a 25-basis-point hike taking the cash rate target to 0.35 percent.
Photo: AFP or licensors
If passed on in full by banks, the rate rise will add more than $AU50 a month to repayments on a $AU500,000 mortgage, and double that on a million-dollar loan.
The move came as little surprise to financial traders, who had priced in around a two-thirds probability of the RBA raising rates this month.
Markets are pricing in the virtual certainty of another rise in June, taking the cash rate target to at least 0.5 percent.
Reserve Bank governor Philip Lowe said the combination of recent very high inflation numbers and evidence that workers were starting to get bigger wage increases as a result of a low 4 percent unemployment rate meant that the time was right for "normalising" interest rates away from emergency lows.
"The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time," he noted in his post-meeting statement.
"This will require a further lift in interest rates over the period ahead."
Markets are pricing in the certainty of another rise in June, with bets split between another 25-basis-point hike and an even bigger increase - the implied cash rate after the RBA's June 7 meeting is 0.7 percent.
Before today's meeting, economists at the major banks were deeply divided about how high interest rates would rise - from a 1.25 per cent forecast at the Commonwealth Bank up to more than 3 percent tipped by ANZ.
Westpac was somewhere in the middle, tipping a 2 percent cash rate sometime next year.
Morrison says people prepared
The rate rise was seen as a blow to the re-election hopes of Australian Prime Minister Scott Morrison.
Morrison, trailing in polls ahead of a national election to be held on 21 May, said Australians had been preparing for a hike in interest rates "for some time" but conceded the decision would be difficult for some.
"Throughout the pandemic, we have seen them double buffers on their mortgages ... and strengthen their balance sheets in preparation," Morrison said at a media briefing.
"For those who are paying more, that will be hard and we understand that."
The hike in rates means millions of Australians will have to cough up more money on their mortgages for the first time since 2010. Cheap loans fuelled a housing boom last year, a windfall for household wealth and consumer confidence, but that has also raised affordability concerns.
With inflation rising twice as fast as wages, real incomes are in the red putting pressure on Morrison's Liberal-National coalition, that has a one-seat majority in the lower house of parliament. Centre-left Labor is ahead in polls.
Asked by reporters whether he had just lost the election, Morrison said: "Of course not". Voters would understand the rate hike was due to global events and not the government's handling of the economy, he said.
Morrison blamed the war in Ukraine and the Covid-19 lockdown in China for the inflation shock but argued Australia was in a better economic position than many developed nations.
- ABC/ Reuters