RBA Raises Official Cash Rate by 0.25 Percent in May

RBA Raises Official Cash Rate by 0.25 Percent in May
A man walks past the Reserve Bank of Australia in Sydney, Australia, on June 7, 2022. Muhammad Farooq/AFP via Getty Images
Alfred Bui
Updated:

The Reserve Bank of Australia (RBA) has made a surprise move by lifting interest rates by another 0.25 percent on May 2.

The latest round of increases takes the official cash rate to 3.85 percent, the highest level since April 2012.

Prior to the announcement, the general market expectation was a pause for May, which was in line with the RBA’s decision to halt the interest rate hiking cycle in April.

The central bank cited high inflation as the main reason for its unexpected decision, despite a drop in the annual consumer price index from 7.8 percent to seven percent in the March quarter.
“Inflation in Australia has passed its peak, but seven percent is still too high, and it will be some time yet before it is back in the target range,” RBA governor Philip Lowe said in a statement.

“Given the importance of returning inflation to target within a reasonable timeframe, the board judged that a further increase in interest rates was warranted today.”

The RBA was also concerned about the potential risks of high services price inflation and labour costs to the economy amid subdued productivity growth.

“Wages growth has picked up in response to the tight labour market and high inflation,” Lowe said.

“The board remains alert to the risk that expectations of ongoing high inflation contribute to larger increases in both prices and wages, especially given the limited spare capacity in the economy and the historically low rate of unemployment.”

RBA Governor Philip Lowe delivers the keynote address during the Australian Banking Association Banking 2022 banking conference in Sydney, Australia, on March 11, 2022. (AAP Image/Dan Himbrechts)
RBA Governor Philip Lowe delivers the keynote address during the Australian Banking Association Banking 2022 banking conference in Sydney, Australia, on March 11, 2022. AAP Image/Dan Himbrechts

Considering the latest inflation data, the RBA predicted that it would still take a couple of years for inflation to return to the target range of two to three percent.

“Inflation is expected to be 4.5 percent in 2023 and three per cent in mid-2025,” Lowe said.

The RBA board also reaffirmed its determination to bring inflation down to the target band and hinted at more potential interest rate hikes in the coming months.

“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve,” Lowe said.

Potential Impacts of the New Rate Hike

Following the RBA’s announcement, the Real Estate Institute of Queensland (REIQ), a peak industry body, said the latest rate hike cancelled the brief reprieve in April and would significantly affect homeowners and investors.
“There’s barely been time for the market to absorb the lagged impact of the previous ten consecutive rises and reassess the approach based on this,” REIQ chief operating officer Dean Milton said.

“Equally, it’s difficult to see how would-be buyers can catch a break when their borrowing capacity has been on such unsteady footing.”

Milton added that the current economic conditions were restricting future housing supply and would make homeownership out of reach for many Australians.

While the interest rate increase would make it more difficult for mortgagors and aspired homeowners, Michael Knox, the chief economist of Morgans–Australia’s largest stockbroking and wealth management network, did not expect a drop in house prices.

“The increase in immigration already announced will stabilise house prices in dollar terms,” he told The Epoch Times, pointing to the surge in overseas immigration after Australia reopened the border.

The chief economist also ruled out the possibility of an economic recession due to the RBA’s aggressive monetary tightening policy.

“The Australian terms of trade remain at close to the highest level this century,” Morgans said.

“The combination of these high terms of trade plus high structural demand from immigration makes an Australian recession close to impossible any time soon.”

With the latest rate hike announced, Commonwealth Bank economists predicted that the current monetary tightening cycle had ended, while ANZ Bank financial analysts expected another 0.25 percent rise in June.
Alfred Bui
Alfred Bui
Author
Alfred Bui is an Australian reporter based in Melbourne and focuses on local and business news. He is a former small business owner and has two master’s degrees in business and business law. Contact him at [email protected].
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