Reserve Bank of Australia Expected to Lift Interest Rates Amid Federal Election

A woman walks past the Reserve Bank of Australia sign in Sydney on October 4, 2016. William West/AFP via Getty Images

Economists and financial markets are now anticipating the Reserve Bank of Australia (RBA) to raise the cash rate in the next board meeting on May 3 instead of June, as previously predicted.

The swift change in thinking comes right after the Australian Bureau of Statistics released new inflation figures on April 27, indicating the annual consumer price index leapt to 5.1 percent from 3.5 percent, the fastest growth in over two decades.

Furthermore, the annual underlying inflation rate, which is more critical to interest rate outlook, soared to 3.7 percent, the highest level since 2009.

This figure is far above the RBA’s inflation target band of two to three percent.

“Australia’s inflation dynamics have changed,” Deutsche Bank Research chief economist Phil O'Donaghue said.

He said that the RBA did not have many opportunities to prevent inflation from going out of control like the situation in the United States.

“Federal election or not, it should act now,” he said.

Financial markets have been priced in the risk of the cash rate increasing to 0.25 percent from the current 0.1 percent in the next RBA’s board meeting.

RBC Capital Markets chief economist Su-Lin Ong has also updated her forecast and predicted that the cash rate would go up by 0.15 percent in May and another 0.25 percent in June, bringing forward the previously estimated timing by one month.

“Moving both during the election campaign and then again immediately after the federal election ... may well take some of the politics out of this impending tightening cycle,” Ong said.

People walk past a retail store in Sydney, Australia, on March 19, 2020. Saeed Khan/AFP via Getty Images

If the RBA makes a move on May 3, it will mark the first time the central bank has acted without the involvement of politics since the cash rate hike during the November 2007 election campaign.

Prime Minister Scott Morrison said that the decision to raise interest rates was left to the independent RBA and that the current situation was quite different compared to 2007, when the cash rate was around 6.5 percent.

He also emphasised that the Australian economy’s inflation pressures were due to external factors.

“What we are experiencing right now, Australians are experiencing because of what has happened with the pandemic, the war in Europe, is putting massive pressure on prices around the world,” Morrison told Sky News. “That is really impacting on people’s household budgets, and we understand that.”

However, shadow treasurer Jim Chalmers said the prime minister’s claims on effective economic management were “absolutely torpedoed” by the latest inflation data.

“It is not good economic management if Australian working families can’t get ahead and they can’t get ahead under this government,” he said, adding that it would now be more expensive for people to pay a mortgage.

“It wasn’t that long ago that Scott Morrison was running around, lying to the Australian people and saying, ‘if you elect a Labor government, your interest rates will go up.’ And that’s blown up in his face.”