Australia’s central bank hikes rate for 1st time in 11 years ahead of elections

Australia’s central bank on Tuesday lifted its benchmark interest rate for the first time in more than 11 years. The cash rate rose to 0.35% from 0.1% in a move potentially damaging to a government that will seek reelection on May 21.

The increase was widely expected after official data released last week showed that Australia’s inflation rose to 5.1% in the year through March. That was the highest annual rate since 2001, when a newly introduced 10% federal consumption tax caused a temporary spike.

Inflation in the latest quarter was sharply higher than the 3.5% three months earlier. The March result was driven by a surge in fuel and housing costs and food shortages due to recent Australian floods.

The Reserve Bank of Australia adjusts interest rates to keep inflation within a 2-3% target band. The bank’s Governor Philip Lowe said inflation had increased more than expected but remained lower than in most other advanced economies.

“The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected,” Lowe said 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 normalizing monetary conditions,” he said.

The cash rate had been at a record-low 0.1% since November 2020.

In November, Lowe said it might remain that low until 2024, despite pandemic-induced inflation.

The bank last increased interest rates in November 2010, when the cash rate rose a quarter of a percentage point to 4.75%.

It is the first time that the bank, whose independence of government was enshrined in legislation in 1996, has shifted interest rates during a federal election campaign since 2007.

Two weeks after the benchmark rate rose by 0.25 of a percentage point to 6.75% in November 2007, Prime Minister John Howard’s conservative government was unseated after more than 11 years in office.

Prime Minister Scott Morrison’s conservative government is seeking a rare fourth three-year term in the May 21 vote.

Australian housing prices surged by 24% last year, according to the Australian Bureau of Statistics. Soaring costs for homes have left Australians among the most indebted in the world and ill-prepared for higher interest rates.

Opposition treasury spokesperson Jim Chalmers described the rate hike as a “full-blown cost of living crisis on Scott Morrison’s watch.”

“Scott Morrison’s economic credibility was already tattered and now it is completely shredded,” Chalmers told reporters.

The S&P/ASX 200 fell 0.3% to 7,328.80 on Tuesday.