The Reserve Bank of Australia’s move means millions of Australians face higher home loan repayments.
Australia’s central bank has hiked interest rates for the first time in more than a decade after following the lead of a growing list of Asia-Pacific economies taking action to curb rising inflation.
The Reserve Bank of Australia (RBA) raised interest rates to 0.35 percent from a record low of 0.1 percent on Tuesday.
The first rate hike since late 2010 comes after Australia’s consumer prices rose at their fastest rate in two decades in the first quarter, fueled by rising fuel, housing and food costs.
The higher reference rate – which reflects the interest banks charge on mutual loans – means millions of Australians will face higher home loan repayments.
According to RateCity data, the average A$500,000 ($355,000) mortgage holder could pay an additional A$65 ($46) a month in repayments if banks passed on the higher interest rate in full.
Mariano Kulish, an economics professor at the University of Sydney who used to work at the RBA, said the central bank’s decision marks a “major shift” from its relatively dovish stance on inflation just a few months earlier.
“I think there are two big elements,” Kulish told Al Jazeera. “One is that monetary policy normalization has already begun in the United States. Advanced economies are concerned.”
“I think the last two readings of inflation…suggest that they’re in for a very big surprise and that they’re worried about inflation becoming ingrained or more stubborn here, so it justifies a move sooner rather than later.” “, he said.
Tim Harcourt, chief economist at the Institute for Public Policy and Governance (IPPG) at the University of Technology Sydney, said the central bank had no choice but to announce a moderate rate hike as inflation is well ahead of its 2-3 per cent target.
“But that gives them room if the global economy slows down later in the year,” Harcourt told Al Jazeera.
Australia’s annual inflation rate hit 5.1 percent from January to March, the highest since 2001.
While widely expected, the RBA’s decision could have a significant impact on the course of Australia’s upcoming May 21 federal election.
Prime Minister Scott Morrison’s Liberal National Party is trailing the centre-left Labor Party, which is battling on a range of issues including the rising cost of living.
The RBA last raised interest rates in the middle of a campaign in 2007, when John Howard tried unsuccessfully to secure a fifth straight term.
Before the RBA’s decision, Morrison said voters would understand that any hike in interest rates was due to global events and not his government’s handling of the economy.
“The situation that Australia is facing is a situation that the whole world is facing and I think Australians understand that,” Morrison told reporters.
Reserve Bank Governor Philip Lowe said the combination of high inflation numbers and signs of improving wage growth called for interest rates to normalize after years of hardship.
“The Board is committed to doing whatever is necessary to ensure that inflation in Australia returns to target over time,” he said in a statement after the meeting.
Australia is the latest Asia-Pacific economy to hike interest rates in recent weeks, after South Korea, Singapore and New Zealand.
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