Australia’s central bank hikes interest rates, flags more to come By Reuters

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© Reuters. Pedestrians walk past the main entrance to the Reserve Bank of Australia (RBA) head office in central Sydney, Australia, October 3, 2016. Picture taken October 3, 2016. REUTERS/David Gray/Files

By Wayne Cole

SYDNEY (Reuters) – Australia’s central bank on Tuesday raised its main cash rate by a surprisingly large 25 basis points to 0.35%, its first hike in more than a decade, and flagged more to come as it runs down the curtain on pandemic stimulus.

The news will not be welcome to Prime Minister Scott Morrison as he fights a tough election campaign that, going by opinion polls, could see him turfed out of office on May 21.

Wrapping up its May policy meeting, the Reserve Bank of Australia (RBA) said it was the right time to begin withdrawing extraordinary monetary support as inflation had picked up significantly and the economy was near full employment.

“The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time,” RBA Governor Philip Lowe said in a statement. “This will require a further lift in interest rates over the period ahead.”

Lowe has scheduled a media conference for 0600 GMT.

The size of the move helped lift the local dollar up 1% to $0.7116 as a majority of analysts in a Reuters poll had expected a rise to only 0.25%.

The policy shift came after consumer price inflation spiked to a 20-year peak of 5.1% in the first quarter, led by costs for petrol, housing, food and education.

Core inflation jumped to 3.7% and above the RBA’s target band for the first time since 2010, a radical turnaround from recent years when it consistently undershot.

The red-hot report led markets to narrow the odds on a hike in May, even though many analysts suspected the RBA would rather wait until after the election and to see if wages data due on May 18 would confirm a long-awaited pick up.

MARKETS SEE 0.75% BY JUNE

Futures quickly priced for a move to 0.75% in June and a whole string of hikes to around 2.5% by the end of the year, and 3.5% by the middle of 2023.

That would be the most aggressive RBA tightening cycle in modern history and a drag on consumer spending power given household debt is at all-time highs.

The uber-hawkish outlook in part reflects the global rush to tightening, with markets wagering the Federal Reserve alone will hike by 150 basis points by the end of July.

The RBA also announced it would let its more than A$350 billion ($249.03 billion) of government bond holdings expire at maturity, rather than actively sell them as some central banks are doing.

Rising mortgage rates will only add to surging cost of living pressures that are a headache for the Liberal National government as it campaigns heavily on economic management.

An ANZ survey out on Tuesday showed consumer confidence nose-dived 6.0% last week, the sharpest drop since an Omicron wave swept through the eastern seaboard in January.

“This is the lowest level for consumer confidence at the start of a tightening cycle since the inflation targeting regime began in the early 1990s,” noted ANZ’s head of Australian economics, David Plank.

“This may see the RBA tighten more slowly than the market is pricing.”

($1 = 1.4055 Australian dollars)

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