RBA hikes interest rates to 0.35%

03 May 2022

The Reserve Bank of Australia (RBA) has hiked its main cash rate by 25 basis points to 0.35%, the first increase in over 10 years, and signalled more are on the way.

During its May policy meeting, the central bank said it was time to start withdrawing the monetary support as inflation had risen considerably and the economy was close to full employment, Reuters reports.

"The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time," RBA Governor Philip Lowe said in a statement. "This will require a further lift in interest rates over the period ahead."

The rate hike saw the Australian Dollar move up 1% to $0.7116 as the majority of analysts polled by Reuters news agency had forecast a rise to just 0.25%.

The shift in policy following consumer price inflation hitting a two-decade high of 5.1% in Q1, was driven by costs for housing, food, education and petrol. Core inflation rose to 3.7%, exceeding the central bank’s target range for the first time since 2010.

The report led markets to reduce the odds on an increase in May, even though many analysts forecast the RBA to wait until after the election and see if wages data due to be published later in the month confirms a rally.

Futures priced in a 0.75% move next month and further hikes to approximately 2.5% by the end of 2022 and 3.5% by the middle of next year.

In addition, an ANZ poll out on Tuesday revealed consumer confidence dropped 6.0% last week, the steepest fall since the breakout of the Omicron variant.

"This is the lowest level for consumer confidence at the start of a tightening cycle since the inflation targeting regime began in the early 1990s," said ANZ's head of Australian economics, David Plank.

"This may see the RBA tighten more slowly than the market is pricing."