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National
Colin Brinsden, AAP Economics and Business Correspondent

RBA takes firm action to tame inflation

The first major bank to follow the Reserve Bank of Australia’s biggest interest rate rise in more than 20 years believes its customers can manage the increase.

The central bank jacked up the cash rate by 50 basis points to 0.85 per cent, which was more than most economists had expected, after Tuesday’s monthly board meeting.

It’s the biggest single hike since 2000.

While rate rises may cause pain for borrowers, RBA Governor Philip Lowe said it had to get inflation under control.

A major business group said the RBA’s decision was understandable given the inflationary pressures in the economy, where iceberg lettuce now costs about $12, compared to about $4 a year ago.

“The decisive action taken by the Reserve Bank was understandable to normalise monetary settings and tame inflationary pressures,” Australian Chamber of Commerce and Industry chief executive Andrew McKellar said.

“Inflation is hitting businesses especially hard, particularly surging energy prices.”

Westpac is the first of the big four banks to follow the RBA and will lift variable home loan rates by 50 basis points for new and existing customers on June 21.

Westpac Consumer and Business Banking head Chris de Bruin said the bank’s customers had increased savings or mortgage repayments during the coronavirus pandemic.

“This means the majority of our customers are ahead on mortgage repayments and have a buffer available to help them manage an interest rate increase,” he said.

Mr Lowe warned inflation was likely to be higher than the central bank had expected just a month ago, and the size and timing of further rate increases will be driven by incoming economic data.

Inflation spiked to 5.1 per cent in the March quarter.

The RBA expects inflation to hit six per cent by the end of the year, which would be well above its two to three per cent inflation target band.

“It’s headed comfortably above six per cent,” Deloitte Access Economics economist Chris Richardson said.

“Partly given what is happening around gas … but also petrol prices, which have risen again.”

BetaShares chief economist David Bassanese said the RBA’s decision to inflict “shock and awe” on the economy showed it was heeding the lessons of the US Federal Reserve “which arguably waited too long to lift interest rates as US inflation lifted last year”.

He expects four further 25 basis point rate hikes this year, which would take the cash rate to 1.85 per cent – well below what financial markets have priced in.

“If the RBA did match market expectations – a 3.2 per cent cash rate by year-end – it would virtually guarantee a substantial economic slowdown, if not recession in 2023,” Mr Bassanese said.

Treasurer Jim Chalmers will get the opportunity to share his insights on the economy when he addresses a Sky News-The Australian event in Sydney on Wednesday.

Separately, Treasury Secretary Steven Kennedy will speak at an Australian Business Economists lunch in Sydney on the changes in the economic environment since the previous government’s budget in March, and what factors may shape Labor’s first budget in October.

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