SYDNEY—The Reserve Bank of Australia raised its benchmark interest rate for the first time in more than a decade, acting to tame elevated inflation that is threatening the country’s economic recovery from the Covid-19 pandemic.
The RBA lifted the cash rate to 0.35%, from 0.10%, and signaled further increases are likely as it seeks to bring long-term inflation back toward its 2%-3% target. It represents a significant gear shift by the RBA, which as recently as March had been signaling patience even as other global central banks laid the groundwork for aggressive moves to tighten monetary policy.
The Federal Reserve has signposted a rapid series of interest-rate increases as U.S. inflation runs at its fastest pace in decades and the labor market remains extremely tight. The Bank of Canada recently lifted its target for the overnight rate by a half-percentage point from 0.50% to 1.0%, its biggest rate increase in over two decades. The Reserve Bank of New Zealand raised its policy rate by a half-percentage point last month, and left the door open to another similar oversize increase at its May meeting.
Australia shows how inflation can become a problem even while an economy benefits from higher prices of key exports, such as iron ore and coal, as the war in Ukraine heightens concerns around shortages of key commodities and Covid-related lockdowns in the key manufacturing hub of Shanghai disrupt supply chains.
The consumer-price index rose 5.1% on year in the first quarter, with core inflation also soaring above the RBA’s inflation target at 3.7% on year. Economists noted that quarterly inflation has only been higher once in the past three decades: when Australia introduced a 10% goods and services tax in July 2000.
“The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time,” RBA Gov.
said in a statement explaining the central bank’s decision on Tuesday. “This will require a further lift in interest rates over the period ahead.”
Mr. Lowe forecast core inflation of around 4.75% this year, with headline CPI of around 6%. The RBA expects both inflation measures to return to around 3% by the middle of 2024, he said.
Australian businesses are having a tough time riding out the impact of elevated inflation, while surveys suggest consumers are increasingly downbeat and tightening budgets. The RBA’s interest-rate rise also comes at a sensitive time politically, with the rising cost of living becoming a key issue in Australia’s national election later this month.
Cleanaway Waste Management Ltd.
, which collects household trash in cities including Sydney, on Tuesday warned that rising fuel prices and labor shortages meant it was likely to miss expectations for annual profits. Recent flooding in Australia’s east coast has also pushed up costs by damaging property, vehicles and equipment while forcing a landfill site to close temporarily.
Joshua Phipps said he is having to offer bigger wages to retain staff at MarketMakers, the small residential blinds and curtains supplier that he co-founded in southwest Sydney. At the same time, shipping costs for imported supplies from factories in China have quadrupled, he said.
“The talk that there hasn’t been wage rises is garbage as far as I’m concerned,” said Mr. Phipps, 51. “We’ve paid all staff 5% for the last two years.”
Still, he said business is booming for now and the company has been able to pass on some of the increased costs to customers.
Higher borrowing costs will test the stability of Australia’s housing market, which is one of the most indebted in the developed world. The RBA last raised interest rates in November 2010. Around one million homeowners with mortgages across the country have never experienced a time when interest rates were going up.
Emma Edmonds is one of them. The 30-year-old got a first foothold on the property ladder around a decade ago and took on a mortgage of 700,000 Australian dollars, equivalent to $494,000, three years ago when moving to the South Sydney home where she lives with her family, including three children.
“Having not seen a rate rise in the 11 years of having a mortgage you get comfortable and you do forget that it could always go up at any second,” she said.
Ms. Edmonds said she knows many people with several credit cards from different banks who are vulnerable to rising borrowing costs. “I know that if the rates go up, they are going to be not comfortable at all,” she said.
Market bets suggest the RBA could raise interest rates by around 2.5 percentage points by December, inclusive of Tuesday’s increase.
While many people have used the extended period of record-low interest rates to get ahead in their mortgage repayments, others could become increasingly stressed financially. The impact could be amplified if house prices fall in response to rising rates and people curb their spending because they feel less wealthy.
The RBA last month sounded a warning that the housing market is looking more fragile, as more households have taken on high levels of debt relative to their incomes. Its modeling suggests a two-percentage-point rise in the benchmark interest rate would lead to house prices falling by 15%.
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