/ 04 May 2022

Interest rates rise and there’s more on the way

Image source: Getty
Image source: Getty

We’re on the up… The Reserve Bank of Australia’s Governor Philip Lowe yesterday confirmed that interest rates will rise from 0.1% to 0.35% – the first official rate hike in more than 11 years. But wait, there’s more… Lowe says that rising inflation “will require a further lift in interest rates over the period ahead”, with a “normal” official rate looking like 2.5%. The Commonwealth Bank was first out of the gate last night, announcing it will pass the 0.25% increase in full – ANZ and Westpac have followed. On a $650,000 mortgage, the increase will add $86 a month to repayments.

The Aussie economy has revved up more quickly than expected, and he says there’s some good news to point to. Unemployment now sits at 4% and it’s expected to fall to 3.5% by early next year – which would be a 50 year low. And he says that there’s evidence that wages growth has been picking up. “In a tight labour market, an increasing number of firms are paying higher wages to attract and retain staff, especially in an environment where the cost of living is rising,” he said. This brings us to last week’s higher than expected inflation rate of 5.1% for January-March… That all means the RBA thinks it’s time to “normalise” rates. “The board judged that now was the right time to begin withdrawing some of the extraordinary monetary support put in place to help the Australian economy during the pandemic,” Lowe said. Note: the record low rate of 0.1% was one of those measures.

Economists say a string of interest rate rises in the pipeline will make some businesses and consumers think twice about borrowing and spending money. “The Reserve Bank is basically increasing the cost of borrowing money to decrease the speed of the cost of living going up,” said ANZ senior economist Adelaide Timbrell. Regardless of what the analysts say, there’s significant political fallout because it puts both the major parties under pressure to explain how they will handle rising cost of living pressures 2.5 weeks out from election day. Labor wasted no time getting stuck into the Coalition yesterday. “Scott Morrison’s economic credibility was already tattered and now it is completely shredded,” Treasury spokesman Jim Chalmers said. But PM Scott Morrison was having none of it, saying that the rate rise is proof that the economy is recovering from the worst of the pandemic – something that’s been managed on his watch.

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