RBA governor Philip Lowe looks set to hike interest rates in May

Multiple hikes are likely over the rest of the year, as the Reserve Bank scrambles to shift policy for the first time since 2010.

RBA Governor Philip Lowe. Picture: Richard Dobson

Australia has an inflation problem, and the Reserve Bank of Australia is set to scramble to raise interest rates next week for the first time since 2010, with multiple rate increases likely over the remainder of the year.

First-quarter inflation data, published on Wednesday, came in well above expectations, showing the RBA can no longer play down the fact that many major economies are facing the fastest pace of price growth since the 1980s, triggering dramatic policy tightening.

Inflation in Australia raced at a rate not seen in over 20 years in the first quarter, showing the RBA to be woefully behind the policy curve, and creating the need for a dramatic and immediate policy response.

That could result in a 40-basis-point rise in the official cash rate at the central bank’s May policy meeting on Tuesday.

That would take the official cash rate from 0.10 per cent to 0.50 per cent, with financial markets betting the official rate could rise to around 2.50 per cent by the end of the year.

The trajectory expected by money markets, if realised, implies that the RBA will have to announce at least a few 50-basis-point interest-rate increases on the way up, making it the fastest tightening cycle since the mid-1990s.

The RBA has for some time been a laggard compared with its global peers, keeping its official cash rate at a record-low 0.10 per cent. As recently as a few months ago, Governor Philip Lowe said raising rates this year was merely “plausible.”

Late in 2021, the RBA’s narrative held that it might be 2024 before wages were growing at a rate fast enough to persuade policy makers that inflation had sustainably returned to its 2-3 per cent inflation target.

The first quarter’s consumer price index showed an on-year rise of 5.1 per cent, with trimmed mean inflation rising 3.7 per cent, the fastest annual pace of price growth since 2009, up from 2.6 per cent in the fourth quarter of 2021, according to data from the Australian Bureau of Statistics.

The price gains were broadbased, with rising costs for fuel, food, dwelling construction and education fees cited as major contributors.

But inflationary pressures also broadened out, with the share of items in the CPI basket rising by more than 3 per cent annually now at 56 per cent, ticking over the 50 per cent mark for the first time since 2009, and up from 35 per cent in the prior quarter.

“The latest inflation blowout adds significant pressure on the RBA to immediately start raising interest rates and to do so more aggressively than initially thought likely,” said Shane Oliver, chief economist at AMP.

The RBA has been arguing that it wants to see an acceleration in wage growth before raising interest rates. But that is a luxury it can no longer afford.

The pursuit of full employment has been a big part of the RBA’s narrative on why it has refrained from tapping the policy brakes. The jobless rate is now at 4 per cent and is approaching its lowest level since 1974. That’s a strong outcome, and the RBA may have to abandon hope lowering the level even further this year.

An interest-rate increase in May might attract the ire of the ruling Liberal-National coalition government, given that it is trailing in national polls just weeks out from a federal election on May 21, but the rapidly developing inflation problem across the country requires immediate action, regardless of any political ramifications.

Dow Jones newswires