The Reserve Bank of Australia needs to raise interest rates now

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The Reserve Bank must raise interest rates on Tuesday to contain inflation.

Figures released last week showing annual consumer price inflation at a two-decade high of 5.1%, and other indicators that price pressures continue to build, mean there are an overwhelming argument for raising the cash rate target from the pandemic emergency trough of 0.1 percent. hundred. A gradual return to more normal interest rates is in Australia’s interest.

It has been more than 11 years since the Reserve Bank last raised official interest rates. Credit:Ben Rushton

The Reserve should begin this process now or risk being forced into more aggressive increases to fight inflation. The central bank’s board will have understandable concerns about the exchange rate moving during a federal election campaign. It has been over 11 years since the last official interest rate hike in Australia and many people with mortgages have never faced the prospect of higher borrowing costs.

But having official interest rates close to zero is no longer justified when unemployment is at 4% and inflation above 5% (and rising). History shows that the longer high inflation persists, the higher consumers’ inflation expectations rise, making it even more difficult to lower price growth. “The RBA has run out of time on its side and should act now and do so decisively,” says AMP chief economist Dr Shane Oliver.

Given the strong case for higher interest rates and the lingering debate over household cost of living pressures, the public expects action. If the RBA fails to raise rates now, many will assume the delay is due to the election, which will damage the bank’s hard-won reputation for independence.

The RBA asserted this independence in November 2007 when its board chose to raise rates during a federal election campaign. It is crucial for the reputation of the central bank that the current board does so again on Tuesday.

The RBA could opt for a modest hike of 0.15 percentage points, taking the official exchange rate to 0.25%, although a hike of 0.4 percentage points to 0.5% would signal a strong desire to anchor inflation expectations.

Global factors supported rising inflation in Australia, in particular supply chain disruptions caused by the pandemic and the Russian invasion of Ukraine, which pushed up commodity prices.

But government support for households during the pandemic has also contributed to inflationary pressures. The pre-election largesse targeted at voters by the Morrison government in the March federal budget, and backed by Labor, is adding fuel to the flames of inflation.

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