The RBA board’s move has heightened the political fight on economic management less than three weeks out from the election.
Morrison stopped short of saying sorry that Australians would face higher costs and said the country should trust the Coalition to manage the economy after the election.
“I sympathize with Australians as they face higher cost-of-living pressures. I sympathize with Australians when they face higher repayments on their homes. Of course, I do,” the prime minister said.
“That’s why we’ve provided the relief and the budget. That is the function of our strong economic plan.”
But shadow treasurer Jim Chalmers said the Coalition had no plan for the economy after the election as Australians were faced with skyrocketing inflation, rising interest rates and falling real wages.
“The difference between the government and Labor under Anthony Albanese is we will do what we can to grow the economy the right way,” Mr Chalmers said on Tuesday.
“This is a tough day for Australians. This is another aspect of Scott Morrison’s triple whammy in his cost-of-living crisis, falling real wages, rising interest rates and inflation spiraling out of control.”
The RBA governor revealed cost-of-living pressures were likely to grow in coming months, saying inflation would get to 6 per cent and would not get back to the top of the bank’s own 2-3 per cent target until mid-2024.
Lowe said while inflation was being pushed up in large part by international factors, there were issues in the Australian economy at play.
“Domestic capacity constraints are increasingly playing a role and inflation pressures have broadened, with firms more prepared to pass through cost increases to consumer prices,” he said.
Speaking to reporters, Lowe said he did not believe the lift in interest rates would stall the economy.
“There’s quite a lot of positive momentum (in the economy) so I think it’s quite unlikely that momentum will be lost,” he said.
“It’s good news: I know many people don’t like rising interest rates but it’s a reflection of the underlying strength of the economy that we can move off these emergency settings.”
AMP chief economist Shane Oliver expects the interest rate to reach 1.5 per cent by year-end, and 2 per cent by the middle of 2023, slowing down home price growth.
“Banks are likely to pass the RBA’s rate hike on in full to their variable rate customers, and deposit rates will also start to rise,” he said.
ANZ’s head of Australian economics David Plank said the Reserve was likely to follow up Tuesday’s rate rise with an even larger one in June, and a move of 0.4 percentage points to a rate of 0.75 per cent was “a distinct possibility”.
KPMG chief economist Dr Brendan Rynne said Australia was likely to see “a succession of 0.25 per cent rate rises over the coming months” on top of Tuesday’s hike.
NAB economists also expect steady increases to the cash rate into next year.
But people should not get too tied up about where interest rates might end up, EY chief economist Cherelle Murphy said, given how quickly local and international factors could change the economy.
“What [the RBA] certainly will do is they will continue to watch situations as they unfold and they will slow down the economy to the extent that they think it needs to be slowed, but they’re not going to crimp growth unnecessarily.”
Higher interest rates were good news for Australia’s savers, CommSec chief economist Craig James said: “And certainly more Australians have been squirrelling away cash over the past few years.”