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RBA makes anticipated pre-election interest rate call
The RBA has announced its rate decision amid the highest inflation in decades.
RBA makes anticipated pre-election interest rate call
As a result of inflation levels not seen since the introduction of the GST in 2001, the Reserve Bank of Australia (RBA) has chosen to lift the cash rate from a record low 0.1 per cent to 0.35 per cent in its first rate hike in over a decade.
"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," governor Philip Lowe said in the bank's post-meeting statement.
"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," he added.
The board dumped its previous position that wages would be a key piece of data in any rate decision and heeded warnings that suggested a longer wait would severely endanger the Australian economy.
Last week, inflation spiked to its highest level in over two decades and while a blow out was predicted, economists didn’t quite expect such a sizable jump in both the headline and underlying inflation.
Market economists had pretty much put all their money on a June interest rate lift, but last Wednesday’s CPI data had pushed many to rethink their estimates, three of the big four banks included.
Westpac, NAB and ANZ all correctly predicted that the RBA would hit the rate button today.
Commenting on the bank’s decision – a decision that threatened to bring the bank’s credibility into question - Anneke Thompson, chief economist at CreditorWatch, said the RBA will now be keenly waiting on Wage Price Index data from the ABS and average earnings in the national accounts to decide on their next move.
“It is likely the board will maintain its position that this data will be a key informant in regards to the velocity of future rate rises,” Ms Thompson said.
“Even if upcoming wage data shows an increase on the current pace of growth of 2.3 per cent, it is a near impossibility that it will be anywhere near the latest inflation figure of 5.1 per cent. This means that the data is almost certain to show that real incomes are going backwards.
“Nevertheless, the RBA will take comfort if they see at least some momentum gaining in wages growth. If we see wage price growth with a 3 in front of it, this might push the RBA to move the cash rate more aggressively, to try and get the inflation spiral under control more quickly,” she noted.
Coming into Tuesday, many economists believed that the election would play on the minds of the RBA board, especially given the scenario of 2007.
Namely, coincidence or not, the last time that the RBA pulled the trigger during an election campaign, the incumbent Howard government promptly lost the vote. This had many pundits wiping beads of sweat off their foreheads ahead of today’s decision.
Asked whether he feels the jitters, PM Scott Morrison told reporters last week that the two situations are worlds apart.
"The first point to note is that in 2007, the cash rate was 6.5 per cent. Today, it is 0.1 per cent," Mr Morrison said.
"So, I think to draw an equivalence between those two issues would be to misunderstand history. They are very different situations.”
More to come
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