Australia raises interest rates for first time since 2010

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On Tuesday, Australia's central bank hiked interest rates for the first time in more than a decade, in a pre-election move aimed at containing skyrocketing consumer costs.

The Reserve Bank of Australia increased the main lending rate by 25 basis points to 0.35%, marking the first rise since November 2010.

RBA governor Philip Lowe stated that “the board judged that now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic."

Lowe added that the economy of Australia has shown resilience and picked up faster than expected. He also said wage growth was also picking up.

The governor added that along with the very low level of interest rates, he believes it is "appropriate" to begin the process of "normalizing monetary conditions.”

The hike was widely anticipated following a surge in consumer price inflation in the March quarter, with both headline and underlying inflation reaching new highs in more than two decades.

While most market experts predicted the rate hike, it came despite Lowe's prior promises that he wanted to see inflation readings as well as wage data - both of which are not available until May 18 – before raising rates.

According to several analysts, the failure to indicate Tuesday's action may jeopardize the credibility of future statements from Lowe and the RBA.

According to Lowe, “Inflation has picked up significantly and by more than expected, although it remains lower than in most other advanced economies."

Lowe stated unequivocally that the May hike will be followed by other increases in the near future.

“The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time,” he stated, adding that “this will require a further lift in interest rates over the period ahead.”

The timing and magnitude of future hikes, however, will be determined by how the "balance of risks" evolves, according to Lowe.

This comes at a time when Australia's Prime Minister Scott Morrison announced federal elections for May 21, as he struggles to retain power after three years beleaguered by floods, bushfires, and the Covid-19 outbreak.

Morrison's conservative administration is attempting to win over Australia's 17 million voters, behind the opposition Labor party in a series of polls while presiding over a recovering economy with a 13-year low unemployment rate of 4%.

"This election is about you. No one else. It's about our country, and it's about its future," Morrison declared.