The treasurer says the latest interest rate hike served as a blunt reminder that high inflation was keeping the economy under the pump.
The Reserve Bank opted to lift the cash rate by another 25 basis points in May in response to the tight labour market, persistent services price inflation and the turnaround in the residential property market.
Treasurer Jim Chalmers said the move surprised markets, with the benchmark S&P/ASX200 index plunging 0.8 per cent in the three minutes after the central bank’s announcement.
Asked if the hike blindsided the government as he put the finishing touches on the federal budget, Dr Chalmers said he did not pre-empt or second-guess decisions by the independent central bank.
“We’ve got our own job to do and that’s my focus,” he told reporters in Canberra.
“One of the important tasks of the budget is to make sure that we can provide cost of living relief without adding substantially to the inflationary pressures in our economy.”
Speaking at an event in Perth on Tuesday night, RBA Governor Philip Lowe said he was confident he could deliver a soft landing for the economy after the board pulled the trigger on another interest rate hike.
Asked if the central bank was playing “recession roulette” by hiking rates again, he told an RBA board dinner in Perth the “narrow path” to dodge a recession “wasn’t getting any narrower” but there was still uncertainty clouding the outlook.
He also said returning inflation to target while preserving most jobs hinged on the population believing inflation would come down quickly.
“If people think inflation is going to remain high then, understandably, they will adjust their behaviour,” he said.
“Firms will be more willing to put up their prices and workers will seek larger pay rises.”
Once inflation expectations become entrenched, he warned, it is much harder to get inflation down and it would require even more interest rate hikes and more job losses.
The 25 basis point hike in May brought the cash rate to 3.85 per cent.
Many experts expected the central bank to keep the cash rate on hold again after pausing in April but incoming data – including inflation, jobs and home price numbers – collectively built the case for another hike.
New data measuring changes in activity in Australia’s industrial sectors pointed to 12 months of contraction, with the latest rate rise likely to pile more pain onto businesses.
The Ai Group Australian industry index sunk 14 points to -20.1, with a negative reading signalling a contraction in activity.
Ai Group chief executive Innes Willox said businesses were stuck between supply constraints and falling demand.
“Yesterday’s decision by the Reserve Bank to raise interest rates, while necessary to contain inflation, will add more pain to businesses facing a worsening economic outlook,” Mr Willox said.
While inflation has passed its peak, industrial sectors still reported strong upwards price pressures.
Activity and sales also sunk into contraction as demand tapered off.
Poppy Johnston
(Australian Associated Press)
