Received

The Reserve Bank of Australia has raised the cash rate by 0.25 percentage points to 0.35 per cent following Tuesday's monthly board meeting, coming after last week's strong inflation figures.

It is the RBA's first rate increase since November 2010 and after holding the rate at a record low 0.1 per cent since November 2020.

RBA governor Philip Lowe said the board judged that now is the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic.

"The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected," Dr Lowe said.

"There is also evidence that wages growth is picking up. Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions."

Figures released last week showed annual inflation rising 5.1 per cent and underlying inflation increasing to 3.7 per cent - well above the RBA's two to three per cent target.

"This rise in inflation largely reflects global factors," Dr Lowe said.

"But 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."

A further rise in inflation is expected in the near term.

The RBA's central forecast for 2022 is for headline inflation of around six per cent and underlying inflation of around 4.75 per cent.

By mid 2024, headline and underlying inflation are forecast to have moderated to around three per cent.

"These forecasts are based on an assumption of further increases in interest rates," Dr Lowe said.

"The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time."

The governor is holding a rare press conference at 4pm AEST.

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Consumer confidence slumped in the past week following a spike in inflation to its highest level in two decades which has raised the risk of an imminent rise in interest rates.

The weekly ANZ-Roy Morgan consumer confidence index - a pointer to future household spending - tumbled six per cent, the biggest drop since mid-January when the COVID-19 Omicron variant surged.

"The strong inflation result of 5.1 per cent was likely the primary driver of the drop in confidence as it increases the prospect of interest rate hikes by the Reserve Bank in the near future," ANZ head of Australian economics David Plank said.

This was supported by confidence dropping 9.6 per cent among people "paying off their home loan", while for people who already own their home or are renting confidence dropped by 4.7 per cent and 4.2 per cent respectively.

Mr Plank noted confidence is now at its lowest level at the start of a monetary policy tightening cycle since the inflation targeting regime began in the early 1990s.

"This may see the RBA tighten more slowly than the market is pricing," he said.

Economists generally are convinced the RBA will lift the cash rate at Tuesday's monthly board meeting, which would be the first increase in more than a decade.

Financial markets are priced for the risk of a 0.15 per cent rise in the cash rate to 0.25 per cent, which is expected to be followed by increases of 0.25 per cent in subsequent months.

Warwick McKibbin, a professor of economics at the Australian National University and former RBA board member, believes there is a strong case for an interest rate rise now.

"We have definitely got a problem with inflation, potentially rising more significantly than previously expected," he told ABC radio.

Prof McKibbin sat on the board the last time the cash rate was increased during an election campaign in 2007 - a poll former Liberal prime minister John Howard went on to lose after campaigning on lower interest rates under his government.

The Morrison government is putting on a brave face after its campaign advertising boasted interest rates have been lower under the Liberals than Labor over the past 30 years.

"Australia's official cash rate has been sitting at 0.1 per cent for 18 months - that's the lowest ever level we have seen in Australia," Finance Minister Simon Birmingham told Sky News.

"There was always going to be some normalisation, particularly at a time where we are now facing huge international and global uncertainty."

Prime Minister Scott Morrison acknowledged that any movement in rates is going to put pressure on those repaying a mortgage.

"For an average mortgage, for a 25-point basis increase, what you're looking at there is just over 80 bucks a month," he told reporters in Melbourne.

"What I'm encouraged by is Australians have been aware of the pressures and that's why they have switched from variable mortgages to fixed-rate mortgages."

© AAP 2022

Consumer confidence slumped six per cent in the past week following a spike in inflation to its highest level in two decades and risk that will trigger an imminent rise in interest rates.

The fall in the ANZ-Roy Morgan consumer confidence index - a pointer to future household spending - was the biggest weekly drop since mid-January when the COVID-19 Omicron variant surged.

"The strong inflation result of 5.1 per cent was likely the primary driver of the drop in confidence as it increases the prospect of interest rate hikes by the Reserve Bank in the near future," ANZ head of Australian economics David Plank said.

This was supported by confidence dropping 9.6 per cent among people "paying off their home loan", while for people who already own their home or are renting confidence dropped by 4.7 per cent and 4.2 per cent respectively.

Economists generally are convinced the RBA will lift the cash rate at Tuesday's monthly board meeting, which would be the first increase in more than a decade.

Financial markets are priced for the risk of a 0.15 per cent rise in the cash rate to 0.25 per cent, which is expected to be followed by increases of 0.25 per cent in subsequent months.

But not all economists are on board with a move at this meeting, particularly in the middle of a federal election campaign.

"The RBA is independent and will no doubt act as it sees fit to achieve its mandate," HSBC chief economist Paul Bloxham said.

"But raising the cash rate 18 days before an election - the first hike in over a decade - would put the RBA right in the political mix."

He believes it would be better to move in June by 0.4 per cent to 0.5 per cent and by which time the central bank will have seen the latest wage growth figures on May 18.

The last time the cash rate was increased during an election campaign was in 2007, a poll former Liberal prime minister John Howard went on to lose after campaigning on lower interest rates under his government.

The Morrison government is putting on a brave face after campaign advertising boasted interest rates have been lower under the Liberals than Labor over the past 30 years.

"Australia's official cash rate has been sitting at 0.1 per cent for 18 months, that the lowest ever level we have seen in Australia," Finance Minister Simon Birmingham told Sky News.

"There was always going to be some normalisation, particularly at a time where we are now facing huge international and global uncertainty."

Prime Minister Scott Morrison went further addressing reporters on the campaign trail on Monday, saying it wasn't about politics, it's about what people pay on their mortgages.

"That is what I am concerned about. I mean, sometimes you guys always see things through a totally political lens. I don't. And Australians don't."

Labor's finance spokeswoman Katy Gallagher agreed a rate increase will be the decision of the independent RBA.

"But, the responsibility the prime minister has is for the cost of living crisis that is hitting the country," she told ABC television.

"You're hard pressed to get between him and a camera and a microphone when things are going well, when things are tough, it's always someone else's fault."

© AAP 2022