Australia’s central bank on Tuesday lifted its benchmark interest rate for the first time in more than 11 years. The cash rate rose from 0.1 per cent to 0.35 per cent in a move potentially damaging to a government that will seek re-election on May 21.
A rise was widely expected after official data released last week showed that Australia’s inflation rose to 5.1 per cent in the year through March. It is the highest annual rate since 2001, when a newly introduced 10 per cent federal consumption tax created a temporary spike.
Inflation in the latest March quarter was sharply higher than the 3.5 per cent three months earlier. The March result was driven by a surge in fuel and housing costs as well as food shortages created by recent Australian floods.
The Reserve Bank of Australia adjusts interest rates to keep inflation within a 2 per cent-3 per cent target band. The bank’s Governor Philip Lowe said inflation had increased more than had been expected but remained lower than in most advanced economies.
“The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected,” Lowe said.
“There is also evidence that wages growth is picking up. Given this, and the very low level of interest rates, it is appropriate to start the process of normalizing monetary conditions,” Lowe added.
The cash rate had been at a record-low 0.1 per cent since November 2020.
In November, Lowe said the rate could remain that low until 2024, despite pandemic-induced inflation.
The bank last increased interest rates in November 2010. The cash rate then rose a quarter of a percentage point to 4.75 per cent.
It is the first time that the bank, whose independence of government was enshrined in legislation in 1996, has shifted interest rates during a federal election campaign since 2007.
Two weeks after the benchmark rate rose by a quarter of a percentage point to 6.75 per cent in November 2007, Prime Minister John Howard’s conservative government was voted out of office after more than 11 years in power. Howard apologized for the rise and said he had sympathy for mortgage holders.
Prime Minister Scott Morrison’s conservative government is seeking a rare fourth three-year term at elections on May 21.
Morrison rejected a journalist’s suggestion that the rate hike would cost his government the election.
He said his government had already helped Australians cope with rising costs in March by temporarily halving the tax on gasoline at a cost of 3 billion Australian dollars ($2.1-billion). The government had also provided millions of low– and middle-income earners with tax offsets and so-called Cost of Living Payments at a cost of AU$8-billion ($5.7-billion).
“I sympathize with Australians as they face high cost of living pressures. I sympathize with Australians when they face higher repayments on their home,” Morrison said.
“When you look around the world, there are few places that people would rather be than right here in Australia and the reason for that is the way that we’ve steered this country through one of our most difficult times,” Morrison added.
The prices of residential properties in Australia surged by 24 per cent last year, according to the Australian Bureau of Statistics. The souring cost of housing has made Australians one of the most indebted populations in the world and ill-prepared for a rise in the cost of money.
Opposition treasury spokesperson Jim Chalmers described the rate hike as a “full-blown cost of living crisis on Scott Morrison’s watch.”
“Scott Morrison’s economic credibility was already tattered and now it is completely shredded,” Chalmers said.
The S&P/ASX 200 fell 0.3 per cent to 7,328.80 on Tuesday.
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