SYDNEY – Australia’s central bank is in a bind as it contemplates its first interest rate increase in more than a decade.
It all comes down to timing. The Liberal-National government faces a close election fight against the Labor opposition on May 21, and the Reserve Bank of Australia (RBA) has to decide whether to hike at its May 3 meeting or wait until early June.
Analysts had assumed it would lift rates from emergency lows of 0.1% at its June 7 review, once it had seen more data on wages and the economy.
All that changed this week when figures showed inflation jumped to 20-year highs in the first quarter, with underlying price measures bursting past the RBA’s 2-3% target range.
So alarming was the surge that markets immediately brought forward the timing of the first hike to May, fully pricing a rise to 0.25%, and pricing in another 225 basis points of increases before the end of the year.
There is also little dispute that tightening is needed given consumer prices rose a red-hot 5.1% in the year to March, well above even the most bearish forecast.
“On seeing that number our thinking is now that it precludes the ‘luxury’ of waiting for the additional information on the labour market and the RBA board will have to act on May 3,” Westpac Bank chief economist Bill Evans said according to Reuters.
The median forecast in Reuters April 27-29 poll of 32 economists showed the RBA is expected to raise its official cash rate by 15 basis points next week. When asked whether the RBA should lift interest rates before the election, 13 of 20 respondents said “yes”.
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