How Australia’s first interest rate hike in over a decade could impact the election | Economic news

Central banks around the world are raising their interest rates.

The U.S. Federal Reserve is expected to raise U.S. rates by 0.5% tomorrow, and on Thursday the United States Monetary Policy Committee bank of england is expected to raise its key policy rate for the fourth consecutive meeting.

Others have raised interest rates so far this year, including the Riksbank, Sweden’s central bank, which last week raised its main policy rate above zero for the first time since October 2014 and the Reserve Bank of New Zealand which last month raised interest rates. by the most in 22 years. Central banks in South Korea, Canada, Chile, the Czech Republic, Poland, Israel, South Africa and Mexico have also raised interest rates over the past six weeks.

To this list are now added the Reserve Bank of Australia which, overnight, raised its main key rate from 0.1% to 0.35%. It was the bank’s first interest rate hike since November 2010.

Explaining the move, Philip Lowe, the bank’s governor, said “it was the right time to start withdrawing some of the extraordinary monetary support that has been put in place to help the Australian economy during the pandemic.”

He added: “The economy has proven resilient and inflation has risen faster and higher than expected. There is also evidence that wage growth is picking up. Given this, and the very low level of interest rates, it is appropriate to initiate the process of normalization of monetary conditions.”

Mr Lowe pointed out that, although lower than some other advanced economies, inflation in Australia has accelerated recently and more than expected.

He also noted that the unemployment rate had fallen in recent months to 4% and was expected to fall to just 3.5% at the start of next year, which he said would represent the lowest unemployment rate for almost. 50 years old.

The move emphasizes the independence of the RBA as, in 18 days, Australia will go to the polls.

Three of Australia’s four major banks – Commonwealth Bank, Westpac and ANZ – immediately announced that they would pass on the rate hike to mortgage customers.

And, while most Australian homeowners have fixed-rate loans like in the UK, that still means around 1.5 million homeowners will see their mortgage payments increased.

“Did your government just lose the elections?

The last time the RBA raised interest rates during an election campaign was in 2007. Just over two weeks later, Liberal Prime Minister John Howard suffered a crushing defeat at the hands of of his Labor opponent, Kevin Rudd.

Scott Morrison, the current Liberal Prime Minister, today insisted the RBA’s decision did not guarantee he would face a similar fate.

To the question of a journalist “Has your government just lost the elections?” Mr Morrison replied ‘of course not’.

He said Australians had been ‘prepared’ for the prospect of higher interest rates and added: ‘We’ve seen them strengthen their own balance sheets in anticipation of what they always knew wouldn’t be. the pursuit of extraordinarily low rates from the RBA.

“It’s not something Australians reasonably thought would last forever.”

But the RBA’s decision gave Mr Morrison’s Labor challenger Anthony Albanese another stick with which to beat his opponent.

Mr Albanese, who has campaigned fiercely on the cost of living, said: ‘When things are good in the economy Scott Morrison takes all the credit, but when things get tough he doesn’t assumes no responsibility.”

The Prime Minister hit back by reminding listeners that earlier in the campaign Mr Albanese had appeared unsure where the RBA’s main key rate was.

He continued, “At least I know what it is.

Warning of further interest rate hikes ahead

Today’s rate hike is unlikely to be the last. The RBA has indicated that further increases are likely in the coming months as the country grapples with the highest level of inflation it has seen in more than two decades. Mr Lowe said it was “not unreasonable to expect” the RBA to raise its key benchmark rate to 2.5% before too long. The news sent the Australian dollar, which on Monday hit its lowest level against the US dollar since January, up 1% against the greenback. The ASX, the country’s main stock market index, fell 0.42%

The big question is whether the RBA has, in the jargon, been “behind the curve” on inflation. It’s an accusation that has also been leveled against both the Fed and the Bank – with critics warning that to fight inflation, both will have to raise interest rates more than they should have if they had acted more quickly.

The RBA is also accused of keeping interest rates too low for too long as it sought to heal its economy during the pandemic. Australia was in the unusual position of enjoying 30 years of uninterrupted growth before COVID-19 tipped it into a brief recession during the first half of 2020. The economy then saw four quarters of growth before suffering only one quarter of contraction from last July to September. year.

Voters in the UK and US, both of which are experiencing far higher levels of inflation than their Australian counterparts, would scoff at the idea that the Lucky Country is in the grip of a cost of living crisis .

However, due to a property boom that has forced many people into borrowing heavily, household debt levels in Australia are unusually high by international standards.

Australian household debt, as a share of income, has risen from just over 60% 33 years ago to more than three times that level today – well beyond the UK, US and Canada. According to the International Monetary Fund, households in a handful of countries around the world, including Switzerland, the Netherlands and Denmark, are also in debt.

This leaves the RBA with a headache. He doesn’t want to risk crashing the economy by putting undue pressure on indebted Australian households and especially given the evidence that consumer confidence is falling.

On the other hand, he dares not let inflation climb much higher for fear of being forced into bigger interest rate hikes along the line. The fact that he was forced to raise rates for the first time in more than a decade, during an election campaign, underscores this.

About Wanda Dufresne

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