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.
“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.”
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.
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.“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.”