Newspaper icon
The latest issue of Financial Standard now available as an e-newspaper
READ NOW

Reserve Bank lifts cash rate target

In the first increase in more than a decade, the Reserve Bank of Australia has raised the cash rate target by 25 basis points to 0.35%.

Announcing the decision this afternoon, RBA governor Philip Lowe said the board determined the time is right to begin winding back the support put in place during the pandemic. It's the first rate rise since November 2010.

"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 normalising monetary conditions."

The central bank has also increased the interest rate on Exchange Settlement balances from 0% to 0.25%.

Lowe said Australia's economic resilience is particularly evident in the labour market, citing the declining unemployment rate and record high labour force participation.

"The central forecast is for the unemployment rate to decline to around 3.5% by early 2023 and remain around this level thereafter. This would be the lowest rate of unemployment in almost 50 years," Lowe said.

Touching on recent CPI figures, Lowe said they largely reflect global pressures but local capacity constraints are increasingly playing a role.

"A further rise in inflation is expected in the near term, but as supply-side disruptions are resolved, inflation is expected to decline back towards the target range of 2-3%," he said.

"The central forecast for 2022 is for headline inflation of around 6% and underlying inflation of around 4.75%; by mid 2024, headline and underlying inflation are forecast to have moderated to around 3%."

These forecasts are based on an assumption of further increases in interest rates, he warned.

Lowe concluded: "The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time. This will require a further lift in interest rates over the period ahead."

"The board will continue to closely monitor the incoming information and evolving balance of risks as it determines the timing and extent of future interest rate increases."

This also marks the first time interest rates have been raised during a federal election campaign since 2007.

Responding to the RBA's decision, the Labor Party said "it's harder than ever to make ends meet - and today, it just got even harder".

Read more: Reserve Bank of AustraliaRBAPhilip Lowe