By
Godfrey Benjamin
December 21st, 2023
Australia’s apex bank, the Reserve Bank of Australia (RBA) has hiked its interest rate for the first time in more than a decade.
As reported by CNBC, the Reserve Bank of Australia increased the rate by 25 basis points to 0.35%, the first of such moves since November 2010. Australia’s rate hike by the RBA is highly justified considering the growing inflation hike in the country. As detailed by the apex bank, it is high time it stopped the “extraordinary monetary support” it was dishing out to the economy with the advent of the coronavirus pandemic.
“The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected,” said Philip Lowe, governor of the Reserve Bank of Australia in a statement. “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 25 basis point rate hike by the RBA was notably above the expected projection from analysts’ 15 basis point increment.
According to Shane Oliver, head of investment strategy and chief economist at Australian financial services firm AMP, the RBA move was born out of the understanding on the part of the apex bank that it has to do something decisive in a bid to get the inflation level down to a manageable level.
With the rate hike, all eyes are now fixed on its short-term influence on the economy and whether it can taper down the Australian consumer price index which jumped by 2.1% in the first three months of the year.
Australia’s Rate of Inflation Is Better than Usual
Despite the growth of inflation as pointed out by the Reserve Bank, it noted that Australia’s inflation experience is still fair when compared to the other advanced economies.
“This rise in inflation largely reflects global factors. But domestic capacity constraints are increasingly playing a role and inflation pressures have broadened, with firms more prepared to pass through cost increases to consumer prices,” Governor Lowe said.
The situation in Eastern Europe that has degenerated into a war between Russia and Ukraine has further lent uncertainty to the entire global inflation narrative. This has also hampered the future economic projections in the short to medium term. Governor Lowe believes the inflation rate is billed to track back down toward the 2% to 3% range.
Correspondingly, there is an expectation that the Australian economy will grow by 4.25% over 2022 and 2% next year. Overall, analysts believe the rate hike will soon start reflecting as it will be felt by the economy’s final consumers.
“Banks are likely to pass the RBA’s rate hike on in full to their variable rate customers and deposit rates will also start to rise,” Oliver added.