A decision by Australia's interest-rate-setting central bank Tuesday to hike the cash rate to its highest level since 2014, despite claiming inflation had passed its peak, sparked criticism from officials and opposition politicians. File photo by Mick Tsikas/EPA-EFE
June 6 (UPI) -- Australia's central bank hiked its main interest rate Tuesday to 4.1% from 3.85% blaming heightened upside risks to the country's 7% inflation rate amid stubbornly high services prices, rising labor costs and lackluster productivity.
While inflation has passed its peak the unlikelihood of it falling to within the 2-3% target range anytime soon made the hike necessary to "provide greater confidence that inflation will return to target within a reasonable timeframe," Reserve Bank of Australia Gov. Philip Lowe said in a news release.
Lowe stressed that the bank's board was determined to do whatever was necessary to meet that goal, warning that further tightening may be on the cards depending on how the economy and inflation panned out.
High inflation made life difficult for people and damaged the functioning of the economy, said Lowe. It also eroded the value of savings, hurt family budgets, made it harder for businesses to plan and invest and exacerbated income inequality, he added.
"If high inflation were to become entrenched in people's expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment," Lowe said.
"The Board is still seeking to keep the economy on an even keel as inflation returns to the 2-3% target range, but the path to achieving a soft landing remains a narrow one. A significant source of uncertainty continues to be the outlook for household consumption," warned Lowe.
He said spending was slowing substantially due to higher interest rates combined with cost-of-living pressures. House prices were on the rise again and some households had savings to fall back on, but others were suffering a "painful" pinch on their finances.
Doubts about the global economy, which is expected to grow at a below-average rate over the next couple of years, would also factor into whether Australian economic growth remained in the black.
However, the ruling Labor Party's Treasurer Jim Chalmers said "the war against inflation is far from won," apparently contradicting the RBA's claim inflation was on the way down.
The Greens party Senator Nick McKim accused the RBA of going "rogue" and called on Chalmers and Prime Minister Anthony Albanese, to take responsibility and reverse the rate hike.
"What the Government should be doing is putting in place things like a corporate super profits tax, attacks on the super-wealthy in this country and use the revenues generated from those taxes to fund genuine cost relief for Australians," said McKim.
"Wiping student debt, putting dental in Medicare, increasing income support, things that would make a meaningful material difference in people's day-to-day lives."
