The Reserve Bank of Australia has raised the cash rate by the biggest margin in one go since February 2000 as it tries to rein in ballooning inflation.

The RBA raised the cash rate by 50 basis points to 0.85 per at its board meeting on Tuesday, the second consecutive monthly increase and larger than most economists had been anticipating.

“Inflation in Australia has increased significantly,” RBA governor Philip Lowe said in a statement on Tuesday.

“Higher prices for electricity and gas and recent increases in petrol prices mean that, in the near term, inflation is likely to be higher than was expected a month ago.”

Inflation spiked to 5.1 per cent in the March quarter and the RBA had forecast only last month that it would increase further to six per cent by the end of the year, a level not seen since 2000.

This is well above the RBA’s two to three per cent inflation target.

“Today’s increase in interest rates will assist with the return of inflation to target over time,” Dr Lowe said.

But he also warned that the board expected to take further steps in the process of normalising monetary conditions in the months ahead.

The RBA had cut the cash rate to a record low of 0.1 per cent during the COVID-19 pandemic.

“The size and timing of future interest rate increases will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labour market,” Dr Lowe said.

He said the Australian economy had proved resilient, noting it had expanded by 0.8 per cent in the March quarter and 3.3 per cent over the year.

At the same time, the labour is strong with unemployment falling to 3.9 per cent, its lowest level in almost 50 years.

“One source of uncertainty about the economic outlook is how household spending evolves, given the increasing pressure on Australian households’ budgets from higher inflation,” Dr Lowe said, also noting that interest rates were increasing.

“Housing prices have declined in some markets over recent months but remain more than 25 per cent higher than prior to the pandemic, supporting household wealth and spending.”

Colin Brinsden, AAP Economics and Business Correspondent
(Australian Associated Press)