By lifting the official cash rate by 0.50% citing higher than expected inflation and general economic resilience, the Reserve Bank of Australia has marked the end of “extraordinary” monetary support for Australia’s economy.
And there is more normalising to come, with Governor Philip Lowe saying, "The board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead.
"The size and timing of future interest rate increases will be guided by the incoming data and the board's assessment of the outlook for inflation and the labour market. The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time."
New treasurer Jim Chalmers welcomed the rise, while acknowledging difficult times would be ahead for some homeowners.
"Difficult news for homeowners already facing skyrocketing costs of living, including spiking energy prices," Dr Chalmers said.
"A better future awaits but first we have to navigate together this inflation challenge we inherited, and the rising interest rates that accompany it.
“We are in the midst of a full-blown cost of living crisis and electricity prices and gas prices are unfortunately part of that pain,” he told Channel 7.
“Our job, as the government, is to make sure that after some of this near-term cost of living relief runs out, that it is replaced by responsible, long-term, sustainable cost of living relief.”
There has been pushback.
Retailers claim RBA moved too quickly
The National Retail Association, which represents the country’s $320 billion retail sector, has accused the RBA of being “heavy-handed”.
“We know that the inflationary pressures in the economy are being driven by external factors such as skyrocketing fuel and power prices, as well as the impact of recent flooding on fresh food.
“These are already having a significant impact on spending and on the viability of many retail businesses.”
In light of this, Lamb believes the RBA should have waited a month to judge the impact of the last raise.
“Many business owners believed the promises of the RBA not to move on interest rates until at least (the end of) 2023.
“For some, it was the assurance that helped them to get by through COVID, floods and other disasters. This decision today will almost certainly be the last straw for many of them.”
CPA critical of inflation reporting
Another industry group critical of the RBA is CPA Australia, which has highlighted perceived flaws in the way Australia reports inflation.
The CPA has called for monthly reporting in line with a move from quarterly to monthly reporting of the Consumer Price Index, a key measurement for the RBA’s cash rate decisions.
“In reaching today’s decision, the RBA has relied on CPI figures for the March quarter,” said CPA Australia senior manager Business Policy Gavan Ord. “These are the same figures it relied on to raise interest rates by a quarter of a per cent in May; and will be the same figures it relies on at its July meeting.
“Because Australia only reports CPI data quarterly, we have a limited understanding of the impact May’s interest rate rise had on inflation. By contrast, the US Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England, for example, all have access to data within weeks of making a decision.
“Current indicators point to inflation having continued a sharp upwards trajectory; and we support today’s decision. With inflation at a 20-year high, the RBA couldn’t afford to wait until June quarter CPI figures are released in late July, before acting.
“However, if the RBA had access to monthly CPI figures, like most advanced economies, it would be in a much better position to form a view and respond effectively. This would also give governments, businesses and other organisations more timely and accurate information to influence financial decisions.”
CPA Australia is calling on the government to increase the frequency of CPI reporting to monthly.
“We’re in a high inflation environment; we need to be agile. This necessitates a degree of urgency to this proposal. Relying on quarterly CPI data when the rest of the world gets it monthly, is like waiting at your letterbox for updates when your neighbour gets them on their phone.”
“Moving from quarterly to monthly reporting may require an increase in funding for the Australian Bureau of Statistics, which collects CPI data. However, we believe the benefits far outweigh the costs. We’re asking the government to implement this proposal as part of its first budget later this year."
What the governor said
“Inflation in Australia has increased significantly. While inflation is lower than in most other advanced economies, it is higher than earlier expected,” Dr Lowe said.
“Inflation is expected to increase further, but then decline back towards the 2-3 per cent range next year. Higher prices for electricity and gas and recent increases in petrol prices mean that, in the near term, inflation is likely to be higher than was expected a month ago.
“As the global supply-side problems are resolved and commodity prices stabilise, even if at a high level, inflation is expected to moderate. Today’s increase in interest rates will assist with the return of inflation to target over time.”
What the brokers and analysts said
“The RBA hiked rates by 50 bps to 0.85% - making it the first 50 bps hike since February 2000. That’s also 75-bps over the past two meetings, which makes it their most aggressive back-to-back meeting on record," City Index market analyst Matt Simpson said.
"I really think the RBA has restored some credibility today by coming out swinging – they may have taken a leaf from RBNZ’s book, but it needed to be done with inflation running so hot.
“Yet despite this, the USD, GBP, CAD and NZD retain a positive yield differential over the Aussie. And they have stopped short of assuring they’ll continue to hike in 50-bps increments in their statement. Still, they acknowledge the ‘board expects to take further steps' in regards to normalising policy. And as they themselves stated the neutral rate is estimated to be between 2-3%, it still leaves room for several more hikes on the table.”
There is more pain ahead according to Capital Economics.
“Interest rates will peak at higher levels than most anticipate and we’re expecting another 50bp hike in July and August,” Capital Economics senior Australia and New Zealand economist Marcel Thieliant said.
“The statement indicated that the main driver was the continued strength in inflation, with the bank noting that ‘higher prices for electricity and gas and recent increases in petrol prices’ will result in higher near-term inflation than earlier anticipated.
“What’s more, the bank downplayed the sluggish increase in the Q1 wage price index by noting that its liaison program ‘continues to point to a lift in wages growth from the low rates of recent years’.”
Firetrail Investments head of investment strategy Anthony Doyle said, “The RBA board has clearly recognised they are well behind the curve.
“Interest rates are now being lifted to more normal levels for an economy with 5.1% inflation and 3.9% unemployment rate.
“The RBA has been slow to recognise the inflation problem in the Australian economy, and in surprising the market today is trying to win back some of its inflation-fighting credibility.”
APAC economist Callam Pickering said there were more aggressive hikes to come.
“Rate hikes in both May and June are just a taste of what’s to come,” said Pickering.
“Whether these rate hikes will work is the trillion-dollar question. Australia has imported high inflation from abroad and that is not typically a channel through which the RBA has tremendous influence.
“Compounding matters, markets are pricing in a cash rate of 2.7% by the end of the year. If the RBA hikes rates at a slower pace - which they almost certainly will - then the resulting depreciation of the Australian dollar will put upward pressure on inflation.”
What the mortgage broker said
"Many experts in the industry expected the RBA to increase the cash rate in June, but a relatively large jump of 50 basis points is still quite alarming as we predicted a more steady increase over the next couple of months," Catherine Mapusua, Head of Lending at Australian digital lending and payments provider WLTH said.
"Australian households are commonly highly leveraged so if lenders pass on the full rate, then some borrowers may need to drastically adjust their budgets sooner rather than later.
"This isn't the end of the rate hikes. Fixed rates that were once attractive at the start of the year no longer seem like viable options moving forward.
"Those who are concerned about their repayments may need to be more conservative about their spending and consider refinancing their current loans. Borrowers should be contacting their lenders to consider their options and find the right solution for their personal situation."
How did the market react?
The Australian sharemarket plunged.
The S&P/ASX200 dropped 114.80 points or 1.59% to 7,091.50, crossing below its 20-day moving average. Over the last five days, the index has lost 1.48% and 2.43% over the last 52 weeks.
Bottom performing stocks were ZIP CO LIMITED down 12.75% and Clinuvel Pharmaceuticals (ASX:CUV) Ltd down 6.59%.
What about the small caps?
A few performed well, but the market was down 1.42% overall on the day. Here’s a look at the better performers.